As the world’s largest economy, the United States (US) of America is a magnet for foreign companies looking to operate overseas.
With a population of more than 327 million, the country offers a big consumer marketplace for domestic and overseas investments. US gross domestic product (GDP) was about $19.39 trillion in 2017, representing about 30% of all economic activity worldwide - and it is growing at an annual rate of 2.6%.
But the size and scale of the country can also represent significant challenges to the unwary. Its federal system, which is comprised of 50 different states, means that legal requirements vary across state borders. This means that maintaining compliance can be a real hurdle to companies entering the market for the first time.
As a result, understanding what is required to do business in the US is crucial to a successful business expansion strategy. We provide some insights here:
How to establish a presence
It is important to set up the most appropriate business entity for your activities. The most common types are corporations, limited liability companies (LLCs) and partnerships. Each brings its own benefits and downsides, and your choice will be based on a number of case-specific legal and business factors.
Each type of entity must be set up in accordance with the laws of the state in which it is formed. Corporations and LLPs require organising documents to be filed with the state government.
US law treats these business entities as if they were legal persons and, in case of insolvency, the entity can declare bankruptcy without risking the owners’ personal assets.
Types of entities
Corporations: Many foreign companies do business in the US as corporations. They are organised under state law and each state has its own rules. But it is worth bearing in mind that they can be created under the laws of one state, even though their principal place of business is in a different one.
However, as a rule, it makes most sense to incorporate in the state in which the business intends to conduct its operations. A certificate of incorporation must be filed with the Secretary of State in the chosen state.
In most states, shareholders elect directors, who set company policy and elect officers. The directors of a US corporation may be foreign nationals but not foreign companies. The internal structure and bylaws of corporations are similar across different jurisdictions but can be customised to meet individual company requirements.
The most common form is a ‘C-corporation’, which is taxed at a separate corporate income tax rate to that of the company’s owners. This means that profits distributed as payments to the owners are taxed twice—first at the corporate level, and second at the owner level.
But double taxation can be avoided if US companies elect to be treated as an ‘S-Corporation’, which is a “pass through” entity for federal tax purposes. This option is not open to foreign organisations, however.
Branch office: Rather than conduct business through a US entity, a foreign one can open a branch office in the US instead. As this entity represents an entire organisation operating in the US and is liable for taxation, it is not advisable to go down this route unless a US lawyer specifically recommends it.
LLC: LLCs are run by ‘members’ who own the business. They may be taxed as a corporation or enable income “pass through” to members and be taxed at that level. An individual member’s personal liability is limited to their investments alone.
Partnerships: Foreign companies can enter into a partnership by agreeing to do business with another entity in the US. A written agreement is recommended, although it is not binding. Agreement can also be reached verbally or by conduct without any documentation being created or filed with the state.
Each new company operating in the US is required to obtain an Employer Identification Number (EIN) from the Internal Revenue Service. The EIN is required for filing taxes and for company identification purposes.
Tax
With a complex system of federal, state and local taxation, understanding business obligations can feel overwhelming for newcomers. To make matters even more complex, after 30 years of little change, the US introduced new income tax legislation earlier this year.
In brief, the recent enactment of US tax reform moves the country from operating a ‘worldwide’ system to becoming a 100% dividend-exemption ‘territorial’ system, which has significant implications for global businesses with US operations. Notable changes include:
- A new, US corporate rate that has been permanently reduced from 35% to 21% for tax years beginning after 2017;
- A base erosion and anti-abuse tax (BEAT) that targets certain ‘foreign’ payments by imposing additional corporate tax liability;
- Interest expense deduction limitations;
- A new ‘hybrid’ financing rule that prevents deductions being made for certain interest and royalties paid to related ‘foreign’ persons;
- ‘Sale of partnership interest’ rules that affect a non-US partner’s loss or gain from the sale or exchange of a partnership interest.
US corporations are eligible to pay federal income taxes on all of their income that is earned anywhere in the world.
Foreign companies doing business in the US may experience ‘transfer pricing’, whereby a foreign parent company may charge its US subsidiary high prices for goods or services. This kind of situation could be investigated by the Internal Revenue Service, which imposes significant penalties for non-compliance.
It is worth noting that the US has many tax treaties with other countries. If the investor’s home country has a tax treaty with the US, expert guidance will be required to deal with the arrangement.
Foreign individuals or entities conducting business in the US are also subject to the Foreign Investment in Real Property Tax Act (FIRPTA). This Act applies a tax if disposing of real property in the country regardless of the taxpayer’s residency status or the existence of a ‘permanent establishment’ in the US.
Legal requirements
Some legal areas, such as patent and copyright, are governed exclusively by federal law. Legislation, such as that governing employment relationships and sales transactions, are primarily set by individual states. When doing business in the US, it is important that foreign companies understand that they are subject to these parallel laws, which often differ from state to state.
Issues, such as contracts, are governed by state law. If parties enter into a written agreement, the courts will usually interpret it based on the written words used, the parties’ conduct, industry custom and applicable laws.
However, all 50 states have adopted some variation of the Uniform Commercial Code (UCC), which generally applies to any contract involving the sale of goods over $500. When interpreting such contracts, courts look to the UCC to address any gaps that were not dealt with in the agreement.
All contracts must include a ‘choice of law’ clause indicating which state’s laws apply. A ‘choice of venue’ clause also designates the state in which a lawsuit may be brought to implement the contract.
Product liability laws are unique to the US and require expert interpretation. The country also has vigorous intellectual property laws governing patents, copyrights, trademarks and trade secrets.
Employment law needs careful clarification. For example, US laws distinguish between “employees” and “independent contractors.” Foreign business coming to the US must comply with domestic law when hiring employees to work locally.
Employees are subject to tax withholding requirements and protected by federal labour laws. Independent contractors, on the other hand, are not subject to tax withholding requirements and are not covered by many labour laws, including the federal minimum wage. Companies doing business in the US should be aware of these distinctions and be careful to classify workers accurately.
Obtaining finance
It can be difficult for foreign entities to open a bank account in the US without having a US presence. But even when a foreign individual or company has created a US entity, it is not unusual for US banks to be more willing to lend money to US businesses than to foreign entities.
Once a foreign business has successfully done business in the US for a while though, it often gains increased access to capital through US banks.
Immigration
All foreigners coming to the US to work must obtain permission to do so in the form of a visa that is issued by a US embassy or overseas consulate. US visa laws are complicated and dealt with at the federal level. Individual states do not regulate or provide visas. Most types of work visa require approval from US Citizenship and Immigration Services.
Foreigners must obtain the correct type of visa for their stay in the US. There are numerous employment categories as well as different categories for investors, business visitors and sponsor-based employment.
It is common when setting up a US entity to seek advice from a US attorney to ensure the correct visa category is selected and application mistakes are avoided. It is vital that foreign business owners and their workers adhere to the terms of their visas as violations may result in their removal from the US or being denied re-entry.
Juan Carlos Rubio has been director of client services at TMF USA since 2016. He has been with the company in different managerial positions for more than nine years. Juan Carlos is a qualified lawyer from El Salvador and holds an LLM from Erasmus University in Rotterdam, the Netherlands.
As the world’s largest economy, the United States (US) of America is a magnet for foreign companies looking to operate overseas.
With a population of more than 327 million, the country offers a big consumer marketplace for domestic and overseas investments. US gross domestic product (GDP) was about $19.39 trillion in 2017, representing about 30% of all economic activity worldwide - and it is growing at an annual rate of 2.6%.
But the size and scale of the country can also represent significant challenges to the unwary. Its federal system, which is comprised of 50 different states, means that legal requirements vary across state borders. This means that maintaining compliance can be a real hurdle to companies entering the market for the first time.
As a result, understanding what is required to do business in the US is crucial to a successful business expansion strategy. We provide some insights here:
How to establish a presence
It is important to set up the most appropriate business entity for your activities. The most common types are corporations, limited liability companies (LLCs) and partnerships. Each brings its own benefits and downsides, and your choice will be based on a number of case-specific legal and business factors.
Each type of entity must be set up in accordance with the laws of the state in which it is formed. Corporations and LLPs require organising documents to be filed with the state government.
US law treats these business entities as if they were legal persons and, in case of insolvency, the entity can declare bankruptcy without risking the owners’ personal assets.
Types of entities
Corporations: Many foreign companies do business in the US as corporations. They are organised under state law and each state has its own rules. But it is worth bearing in mind that they can be created under the laws of one state, even though their principal place of business is in a different one.
However, as a rule, it makes most sense to incorporate in the state in which the business intends to conduct its operations. A certificate of incorporation must be filed with the Secretary of State in the chosen state.
In most states, shareholders elect directors, who set company policy and elect officers. The directors of a US corporation may be foreign nationals but not foreign companies. The internal structure and bylaws of corporations are similar across different jurisdictions but can be customised to meet individual company requirements.
The most common form is a ‘C-corporation’, which is taxed at a separate corporate income tax rate to that of the company’s owners. This means that profits distributed as payments to the owners are taxed twice—first at the corporate level, and second at the owner level.
But double taxation can be avoided if US companies elect to be treated as an ‘S-Corporation’, which is a “pass through” entity for federal tax purposes. This option is not open to foreign organisations, however.
Branch office: Rather than conduct business through a US entity, a foreign one can open a branch office in the US instead. As this entity represents an entire organisation operating in the US and is liable for taxation, it is not advisable to go down this route unless a US lawyer specifically recommends it.
LLC: LLCs are run by ‘members’ who own the business. They may be taxed as a corporation or enable income “pass through” to members and be taxed at that level. An individual member’s personal liability is limited to their investments alone.
Partnerships: Foreign companies can enter into a partnership by agreeing to do business with another entity in the US. A written agreement is recommended, although it is not binding. Agreement can also be reached verbally or by conduct without any documentation being created or filed with the state.
Each new company operating in the US is required to obtain an Employer Identification Number (EIN) from the Internal Revenue Service. The EIN is required for filing taxes and for company identification purposes.
Tax
With a complex system of federal, state and local taxation, understanding business obligations can feel overwhelming for newcomers. To make matters even more complex, after 30 years of little change, the US introduced new income tax legislation earlier this year.
In brief, the recent enactment of US tax reform moves the country from operating a ‘worldwide’ system to becoming a 100% dividend-exemption ‘territorial’ system, which has significant implications for global businesses with US operations. Notable changes include:
- A new, US corporate rate that has been permanently reduced from 35% to 21% for tax years beginning after 2017;
- A base erosion and anti-abuse tax (BEAT) that targets certain ‘foreign’ payments by imposing additional corporate tax liability;
- Interest expense deduction limitations;
- A new ‘hybrid’ financing rule that prevents deductions being made for certain interest and royalties paid to related ‘foreign’ persons;
- ‘Sale of partnership interest’ rules that affect a non-US partner’s loss or gain from the sale or exchange of a partnership interest.
US corporations are eligible to pay federal income taxes on all of their income that is earned anywhere in the world.
Foreign companies doing business in the US may experience ‘transfer pricing’, whereby a foreign parent company may charge its US subsidiary high prices for goods or services. This kind of situation could be investigated by the Internal Revenue Service, which imposes significant penalties for non-compliance.
It is worth noting that the US has many tax treaties with other countries. If the investor’s home country has a tax treaty with the US, expert guidance will be required to deal with the arrangement.
Foreign individuals or entities conducting business in the US are also subject to the Foreign Investment in Real Property Tax Act (FIRPTA). This Act applies a tax if disposing of real property in the country regardless of the taxpayer’s residency status or the existence of a ‘permanent establishment’ in the US.
Legal requirements
Some legal areas, such as patent and copyright, are governed exclusively by federal law. Legislation, such as that governing employment relationships and sales transactions, are primarily set by individual states. When doing business in the US, it is important that foreign companies understand that they are subject to these parallel laws, which often differ from state to state.
Issues, such as contracts, are governed by state law. If parties enter into a written agreement, the courts will usually interpret it based on the written words used, the parties’ conduct, industry custom and applicable laws.
However, all 50 states have adopted some variation of the Uniform Commercial Code (UCC), which generally applies to any contract involving the sale of goods over $500. When interpreting such contracts, courts look to the UCC to address any gaps that were not dealt with in the agreement.
All contracts must include a ‘choice of law’ clause indicating which state’s laws apply. A ‘choice of venue’ clause also designates the state in which a lawsuit may be brought to implement the contract.
Product liability laws are unique to the US and require expert interpretation. The country also has vigorous intellectual property laws governing patents, copyrights, trademarks and trade secrets.
Employment law needs careful clarification. For example, US laws distinguish between “employees” and “independent contractors.” Foreign business coming to the US must comply with domestic law when hiring employees to work locally.
Employees are subject to tax withholding requirements and protected by federal labour laws. Independent contractors, on the other hand, are not subject to tax withholding requirements and are not covered by many labour laws, including the federal minimum wage. Companies doing business in the US should be aware of these distinctions and be careful to classify workers accurately.
Obtaining finance
It can be difficult for foreign entities to open a bank account in the US without having a US presence. But even when a foreign individual or company has created a US entity, it is not unusual for US banks to be more willing to lend money to US businesses than to foreign entities.
Once a foreign business has successfully done business in the US for a while though, it often gains increased access to capital through US banks.
Immigration
All foreigners coming to the US to work must obtain permission to do so in the form of a visa that is issued by a US embassy or overseas consulate. US visa laws are complicated and dealt with at the federal level. Individual states do not regulate or provide visas. Most types of work visa require approval from US Citizenship and Immigration Services.
Foreigners must obtain the correct type of visa for their stay in the US. There are numerous employment categories as well as different categories for investors, business visitors and sponsor-based employment.
It is common when setting up a US entity to seek advice from a US attorney to ensure the correct visa category is selected and application mistakes are avoided. It is vital that foreign business owners and their workers adhere to the terms of their visas as violations may result in their removal from the US or being denied re-entry.
Juan Carlos Rubio has been director of client services at TMF USA since 2016. He has been with the company in different managerial positions for more than nine years. Juan Carlos is a qualified lawyer from El Salvador and holds an LLM from Erasmus University in Rotterdam, the Netherlands.
