DAMALION USA DESK
Doing Business in the United States for Foreign Investors
As the world’s economic superpower, the United States offers some of the best business opportunities for foreign investors. To maximize all the best opportunities the country has to offer, it is crucial to gain a deeper understanding of the US legal system and all other laws that are relevant to establishing a business in the US.
The US remains to be one of the most attractive markets for foreign investors that are looking to access the largest global consumer market. Consequently, US companies keep an eye on foreign partnerships to take advantage of new international markets, technology, and skills.
Doing Business in the United States
According to the World Bank, the US ranks 55th in the world in terms of ease and convenience in setting up a business. For foreign entities, it is important to remember that requirements for forming a company will vary by state. In some states, business registration requirements may vary by city.
All 50 states have their own set of rules and regulations during company registration. It can be challenging to determine which state of incorporation delivers the best tax or commercial advantages while reducing legal exposure for a specific industry or business type.
– The states of Wyoming and Nevada are slowly becoming popular destinations for foreign companies that wish to do business in the United States due to the absence of state corporate income tax
– There are also many companies that choose to incorporate in Delaware due to the numerous protections that its courts offer
Corporate entities need additional requirements to be filed in each state in which a legal or physical connection is established. In essence, a company must remain compliant in all states during active operation.
- Legal System
The United States runs a federal system of government which means laws are made at the national, state, and local. All 50 states have their own set of state and local laws that govern their respective jurisdictions. Patent and copyright are under federal law while employment relationships, sales transactions, and contracts are handled by individual states. There are also other aspects of the law that are shared by both federal and state laws.
Foreign investors and businessmen should be familiar with a parallel systems of laws that typically differ from one state to another.
- Entity Choice
A foreign company must choose a business entity form if they plan to run business operations in the US. Here are the most common types of business structures that foreign investors can take a pick from:
- Limited Liability Companies (LLC)
Each of these business legal forms has its own set of benefits and the entity type choice will larger depend on case-specific legal and business elements. Businessmen should follow the laws prevailing in the state where they decide to build their business on. By rule, all business entity types except for partnerships need to process documents and submit them to the state government.
Types of business forms
1. Branch Office
– Foreign companies are not mandated to conduct business through a US business entity but launch a branch office instead
– A branch is technically an entity under the direct supervision of a parent company.
– A branch office is considered a foreign company with US business operation
– The parent company will be considered “doing business in the US, which means it will be subject to taxation on all generated income, rather than limiting the taxation to the overall income of the branch office alone
– Liability falls on the parent company and not the branch office alone
– Foreign businesses typically do not choose branch office format unless strongly advised by a US attorney.
– More advantageous business form set-up than a branch office.
– Established and follows state law; hence it is important to follow state-specific rules in the creation and operation of a corporation
– A corporation may be created in one state and build its headquarters in a different state
– Ideally, foreign companies should incorporate in the state where they intend to run their operations
– Washington State is a popular choice among foreign investors due to its predictable and business-friendly regulations under the Washington Uniform Business Organizations Code and the Washington Business Corporation Act.
Corporation Set-Up Process
– Certificate of incorporation filed online with the Secretary of State in the chosen state
– Owners and shareholders are required to elect directors that oversee the creation of policies and elect important officers, including the president, vice president, secretary, and treasurer
– Director/s of a US corporation may be a foreign national- a natural person and not a foreign company
– A corporation’s internal structures and bylaws are the same across all jurisdictions and can be tailored to meet individual company requirements
The Most Common Forms of Corporations are:
– Taxed based on corporate income and not from company owners
– Profits that are considered as payments to company owners are taxed twice- at the corporate and personal level
– Company owners can avoid double taxation by establishing an S-corporation instead
– A foreign company cannot be elected or considered as an S-corporation
Other Important Facts about US Corporations
– Treated as legal persons, which means they can enter into contracts, file a lawsuit and can be sued, carry their own liabilities as a natural person does
– Individual owners can avoid liability for the actions of the corporation
– The corporation can declare bankruptcy without putting an owner’s personal assets at risk for loss
– The main selling point of creating a US corporation is that of excellent protection from personal liability for its owners and directors
3. Limited Liability Company
– Created by registering online with the Secretary of State in the state where a foreign investor wishes to conduct operations
– LLC is governed by laws of the state where it was established
– Must have at least one member, wherein members can be natural persons or a company
– Owners, also known as members, formulate an operating agreement that governs the operational and organizational activities of an LLC.
– Creating an operating agreement is optional. An LLC without a written operating agreement are required to follow the defaulted provisions under a state’s statutes. If an operational agreement does not include certain provisions, default provisions set forth by a state will be automatically applied
– Can be taxed as a corporate or have income “pass-through” to its owners- wherein they will be taxed at the member level
– Foreign companies are taxed at the corporate level to bypass distributions to members reflected on their respective personal tax returns
– LLC is a legal entity separate from its owners or members, thus personal liability will only be limited to their investments
– In most liability cases, creditors may only access the personal assets of members when the latter disregard the separation of corporate identity or utilize the LLC as a shell to avoid liability for a parent company.
– Foreign company partner with another company to do business as a single entity in the United States
– It is advised for two or more partnerships to create a written agreement as a means to formalize the business transaction
– General partnerships do not offer the same liability advantages as corporations and LLCs
– Can be formed by verbal agreement or by filing the necessary documents with a chosen state
– It is important for foreign investors to obtain expert counsel before entering a partnership to do business in the US
Newly Established Compliance Regulations
The Corporate Transparency Act (CTA) or the anti-corruption legislation enacted on 1 January 2021 as part of the US National Defense Authorization Act requires certain corporations and LLC to file beneficial ownership information to the Financial Enforcement Network (FinCEN) of the Department of Treasury.
1. CTA will eliminate anonymously owned and controlled legal entities in the US over a period of two years. No compliance will mean hefty fines for those who violate the law.
2. Beneficial ownership information will be unavailable for general public access.
3. FinCEN has full authority to share information with foreign counterparts
It can be difficult for foreign entities to open a US bank account without a US presence. Even foreign investors and companies that were successful in registering a business may find it challenging to seek financing or capital through traditional US banks. US banks are more willing to lend money once a foreign business has been successful in their US operations for a period of time.
– All foreigners need to obtain a US visa to do business in the country
– US Visa Laws are under federal rule. Individual states do not have any control over the approval of US visas
– Foreign companies may obtain a visa from the US embassy or consulate overseas
– Work visa and other visa types are approved by the US Citizenship and Immigration Services
– Investors need to obtain the correct type of visa, as there are certain visas that are meant for investors, business visitors, and sponsor-based employment
– Foreign investors should seek counsel from a US immigration attorney to determine the right type of visa category and avoid application errors or rejection altogether
– Foreign businessmen should adhere to the terms indicated in their particular visas. Violating any of its terms can result in deportation or denied re-entry into the US
US-Mexico-Canada Agreement (USMCA)
– Agreement of the US with border partners, Canada and Mexico
– Features balancing of various interests in automotive and farming industries
– Ensuring the protection of IP, labor, and environmental rights
– Tax changes focused on efficiently regulating international trade, with United States taking a combative approach to protect its industries and maximize tax receipts
– Canada remains to be the top trading partner of the US in terms of export sales while China is the country for which the largest trade deficit remains year after year
Contracts are governed by individual states. A partnership made over a written agreement will be perceived as an agreement based on the plain language of the writing, the parties’ conduct, industry customs, and other applicable laws.
– All 50 states implement their own variation of the Uniform Commercial Code (UCC) which refers to any form of contract for the sale of goods worth more than $500
– Courts will consider UCC provision to fill in gaps that parties failed to address or indicate in their agreement
– An agreement without consideration is technically invalid
– A return promise must be made between parties to qualify as consideration, which can be in the form of money, performance of services, legal right modification, or forbearing from conducting certain activities
A legal counsel plays a critical role in the negotiations and drafting of contracts. In the US, counsels for all parties involved will exchange several versions of agreements with red lined edits before reaching a final agreement. It is important for foreign companies to seek legal counsel to ensure all deal points are addressed before a contract is finalized.
All contracts in the US should indicate a choice of law clause that indicates the specific state laws to use in interpreting an agreement. Contracts must also indicate choice of venue clause that identifies the state in which a lawsuit may be filed to enforce a contract. Determining choice of law and choice of the venue allows for predictability and helps avoid lawsuits in unfamiliar or distant jurisdictions.
The US tax law is complex; hence it is crucial to obtain professional tax planning and counsel if you plan on doing business in the United States. Under the close eye of the IRS, there are more than 80,000 different tax jurisdictions across the country.
– US companies are subject to separate federal, state, and local taxes
– The federal government through the Internal Revenue Service (IRS) collects income tax, tax on dividends, capital gains tax, passive income tax, and employee payroll tax
– Additional tax obligations will be paid off to the state in which a company conducts its business operations
1. Obtaining an EIN
– An EIN essential identifies a company and is required for filing taxes
– A newly registered company must obtain an Employer Identification Number (EIN) from the IRS
– EIN should be obtained before a company may conduct business or open a bank account
– Applicants are required to fill out an SS-4 form online through the IRS website, by mail, or by fax
– For foreign nationals without a TIN, EIN cannot be applied for online. International applications can only be made by calling 267-941-1099 to obtain an EIN and to answer any matters in relation to the SS-4 form application
2. Tax Treaties
The US is an active party to bilateral treaties with a long list of foreign countries. If your home country has prevailing tax treating with the US, the tax treaty should be consulted as a primary tax planning tool.
Tax treaties prevent double taxation and tax evasion. It also facilitates go commerce between the US and other countries. Treaties describe all conditions under which a foreign company has a permanent establishment in the US. This means that conditions under tax treaties will determine all federal incomes taxes that are required to be made by a foreign company.
If a provision of a tax treating results in lower federal income tax, this must be explicitly indicated and claimed on a company’s federal income tax return. It should also indicate specific provisions on the return form. Failure to comply with this requirement can lead to significant penalties to a company.
3. Corporate Income Tax
A corporation created in the US will be subject to federal income taxes on all of its generated income anywhere in the world. The tax will be levied on next taxable income- a figure referring to gross income less allowable deductions.
Companies in some sectors may be eligible for tax credits, which are used as incentives for investments in certain emerging industries such as renewable energy. Tax credits provide are more significant as they present bigger reductions on a company’s tax bill dollar-for-dollar.
4. Transfer Pricing
Foreign companies operating in the US are not allowed to shift profits to an overseas parent company to avoid the financial stress of taxes. Transfer pricing occurs when a foreign parent company charges the US subsidiary enormous prices for goods and services, including management services and inventory. The aim of transfer pricing is to move pre-tax money overseas.
The IRS is responsible for conducting investigations on companies for transfer pricing practices. If a company is proven to have implemented transfer pricing, it will be mandated to pay steep penalties for such a violation. Hiring defense for a US tax audit is both expensive and time intensive which further adds to the cost of non-compliance. If a company is caught by the IRS, any benefits gained through transfer pricing will be negated by steep penalties.
5. Individual or Expat Income Tax
US citizens or US resident aliens are assessed of tax on their worldwide income, no matter their work or personal residence location. An individual is considered a US tax resident once they obtain legal permanent residency status or are present in the United States for at least 183 days of the latest tax year.
By rule, even if an individual is not a US resident or does not hold legal permanent residency, such natural persons are still required to pay federal income tax on income earned in the United States. Whatever the case, a foreign investor will greatly benefit from proactive tax planning with a seasoned US tax professional. These professionals are familiar with all types of deductions, exemptions, and tax credits to reduce tax liability and ensure adherence to the law. Failure to comply with corporate income tax payments or provisions will be subject to harsh penalties.
6. Foreign Investment in Real Property Tax Act (FIRPTA)
– Foreign individuals and companies doing business in the US are assessed of FIRPTA
– FIRPTA refers to real property disposition in the US, regardless of the establishment of residency in the US
– This tax will be assessed once an individual or corporation purchases or sells real property interest in the US
In less than five years, the US underwent major financial and tax amendments. From the Jobs Act of 2017 which led to the 2018 tax reform to the $2.2 trillion CARES (Coronavirus Aid, Relief, and Economic Security) Act of 2020, and finally the $1.9 trillion stimulus package approved in 2021.
Together with the CARES Act and the subsequent COVID-related stimulus, companies may need to extend or expend their Employee Retention Credit. Major federal tax bills and state tax increase will be enforced in 2021.
It is quite uncommon for well-established nations such as the US to rollout too many changes in a short span of time. However due to the unprecedented impact of COVID, it is highly recommended for companies and advisors to conduct regular meetings to evaluate the impact of ever-changing rules and regulations.
The US is known to have robust and dynamic intellectual property (IP laws) that safeguard intangible assets that add value to a business or distinguish brands and products under a US company.
Four Types of IP in the US
– Protects functional and structural aspects of an invention
– To secure a patent, an invention must be proven new, non-obvious, and novel
– New, original, and ornamental design components of an article of manufacture may also be patented
– Once approved by the US Patent Office (USPTO), a patent owner may impose the right to exclude other companies or individuals from manufacturing, using, selling, and importing an invention or design in the US for 20 years from the date of patent application filing
– Foreign companies doing business in the US may break patent rights of a US company
– Any violation may result in an infringement action in federal court, where a patent owner may seek damaged and an injunction against the violating party
– Foreign patents are not enforced in the US
– A foreign company may introduce or sell a patented product or design in the US given the product has not been sold in other countries
– Securing a patent in the US for an item of manufacture or design by a foreign company is a time-consuming and expensive endeavor
– Trademark rights in the US refers to the use of a word, name, symbol, or combination thereof which the public associates with a specific good or service.
– Federal protection for a trademark is secured through trademark registration with the USPTO
– Trademark holders may file lawsuit against competitors whose marks or designs may confuse or deceive consumers as it will dilute the value of the registered’ owners brand or design
– Trademark owners may register their brand or mark at state level with fewer rights than federal trademark registration
– Foreign companies may also seek protection for their mark or design through USPTO registration
– Foreign trademarks are not enforced in the US
– Trademarks are territorial; therefore, companies should seek protection by filing in countries where they operate
– While filing with USPTO, applicants may also seek protection in up to 84 countries
– The user of a mark or brand may also acquire common law trademark rights by using the mark in commercial activities. These rights are limited as opposed to the protection granted by USPTO
– Refers to exclusive rights granted to an author of his or her work for life plus an additional seventy years for works created on or after 1978
– Copyright protection is made available for architectural, artistic, graphic, literary, musical, sound recordings, and other works that are written down or otherwise established in a tangible medium
– A copyright owner is granted exclusive rights that include the right to reproduce, prepare derivative works based on the original work, distribute copies of the work, perform public performance of the work, and showcase the work
– Even unpublished works may be protected by copyright
– Copyright protection is automatically secured when an author creates a work, thus no need for registration for protection
– Copyrights protection is secured to any work, regardless of nationality or domicile of author
– Based on various treaties wherein the US has partaken, published works by foreign individuals may also be protected by the US Copyright law provided certain conditions are fulfilled
– While registration is not needed, federal registration for copyright protection does not deliver substantial advantages. Benefits include ability to enforce author’s rights in court or to obtain additional remedies during infringement lawsuits
– Copyrights protection is completed through the Copyright Office
4. Trade Secret
– Refers to any information that adds immense value to a business or provides great advantage to the owner as information is secret or unknown to competitors
– Comes in the form of a device, formula, collection of data, or manufacturing techniques
– Trade secrets receive broad protection by state law in all 50 states and under federal law as of May 2016 under the Defend Trade Secrets Act
– Owners are required to maintain reasonable measures to maintain their trade secrets for continued protection
– Trade secret law may also include protection for intellectual property that is not patentable but is integral to a company’s operations, products, or services. Companies typically require employees to sign non-disclosure agreements to protect their trade secrets
Labor and Employment
Foreign investors and businesses planning to do business in the US are required to comply with US laws when employing workers that will be working in the United States.
– Employees are workers subject to tax withholding requirements and protected by federal labor laws
– Independent contractors are not subject to tax withholding requirement and are not coveted by federal labor laws, including minimum wage requirements.
– An independent contractor implements a greater level of behavioral and financial independence than an employee
Foreign companies doing business in the US should be familiar with the differences between employees and independent contractors to avoid tax-related and civil claims under labor laws.
1. Employment/Expat Labor Contracts
– Contracts that refer to employee relations between foreign owners in the US and foreign employees in the US are required to adhere to US laws
– Companies enter contracts with key individuals such as executives, officers, top-rank managers, and others with advanced technical or commercial skills that are crucial to business operations
– Employment contracts may not be highly specific as it may not establish the scope or terms of employment, as well as conditions in which parties can terminate the relationship.
– Without an employment contract, an employee is considered “at will” and the employer or employee may terminate the working relationship for any legal reason without notice in nearly all US jurisdictions
– Employers are mandated to comply with US wage and hour laws when issuing contracts with US employees
– According to Fair Labor Standards Act (FLSA), employers need to pay at least the federal minimum wage and time and one half overtime pay for each hour over 40 per week
– For employees working in states with higher minimum wage, the employer must follow the higher state minimum wage rate
– Employers are required to adhere to the Family Medical Leave Act which establishes the standards for employee absence due to valid medical or family reasons.
2. IP and Inventor Agreements
– Under US law, inventions created by an employee during their employment technically belong to the employer
– In most cases, employment contracts explicitly grant such rights to the employer while requiring employees to fully cooperate to secure federal registration of the IP at issue
– Employment contract may also feature a widen scope of an employer’s rights to include all discoveries and inventions related to their business or made using company tools and resources during the employment term
– An employment contract may also be used to restrict an employee’s ability to create inventions from their access and knowledge of proprietary information and systems
3. Non-Disclosure Agreement
– Majority of US employers require employees to sign a non-disclosure agreement (NDA) to deter employees from sharing proprietary information with competing companies or any other valuable or sensitive information about the company
– NDAs are common during negotiations that involve an exchange of valuable or sensitive information
4. Non-Compete Agreement
– This document limits a former employee’s ability to work or be employed by a competitor
– Non-compete agreements are not enforced in some states and may be inadmissible by the courts
– Non-compete agreements must be reasonable in scope, time, geography, and may not make it difficult for any former employee from earning a living in his or her field of expertise
5. Employee Handbook
– This is a document that provides precise instruction, orients new hires, and establishes company policies
– This document is not a substitute for an employment contract, even when a handbook is signed by an employee
– A handbook may be confused as a basis to change employment terms in some cases
– When creating a handbook, employers are careful in setting policies to avoid creating expectations during an employee’s time period working for a company
6. Anti-Discrimination Laws
– US federal and state laws explicitly prohibit discrimination based on a potential employee or employee’s race, color, religion, age, country of origin, disability, gender, marital status, and veteran status
– Employers cannot punish employees who report discrimination at the workplace
– Anti-discrimination laws must be adhered to with all stages of employment, including during the hiring stage, promotion, and termination
– There are additional laws enacted in state and city levels to further protect employees on the basis of gender identity or sexual orientation
– To ensure compliance, companies include anti-discrimination policies in the employee handbook. Education and training are provided to managers and supervisors about anti-discrimination laws
– An employee that allows an employee to engage in discriminatory behavior and activities can be held liable for that employees’ actions, even if the company policy prohibits discrimination at the workplace
7. Pandemic-Related Legislation
– Employees are provided with mandatory paid leave via a tax credit for COVID-related issues
– Work-from-home mandates bring about legal and tax questions for businesses with personnel based in the US
– Many states have given businesses reprieve from establishing a connection, however relief is impermanent and uncertain and may change over time
– US product liability laws are distinct from product liability laws of other countries
– Majority of states apply strict liability in tort
– Expanded scope of entities that can be held responsible for product-related injuries or accidents and fewer evidence needed to establish liability
– A company involved in the production chain such as makers, distributors, and retailers that sell defective products deemed unreasonably dangerous will be held liable
– A seller will be considered liable even if he or she did display reasonable care and even if the consumer did not purchase the product from the seller
– Damages or losses for product liability are decided by a jury and include compensation for all direct and indirect losses-
– Damages in product liability are relatively high
Product Liability Causes
– Breach of warranty
– Failure to meet the standards that exemplifies reasonable care
– Failure to warn consumers of possible product dangers
Indemnification Provisions in US Sales Contract Features:
– Agreement made by one party to provide compensation for certain costs and expenses
– An obligor agrees to reimburse the obligee for claims, causes of action, liabilities, and losses arise from related injuries caused by a defective or dangerous product
– Foreign companies doing business in the US are recommended to carry enough insurance coverage to protect themselves from product liability claims
Damalion helps foreign investors both big and small to incorporate a business in the United States.
We have the expertise and experience allows us to help clients the challenging tasks of building a company in the United States.
Our team of professionals are also skilled in providing various integral business solutions, including compliance, entity management, accounting, taxation, payroll support, and many more across all fifty states. If you wish to learn more about our services and how we can assist you in making your US company a success, contact us today.
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