Rooney PC routinely advises non-U.S. businesses with respect to formation of state-side subsidiaries and other U.S. legal issues. Below we have provided a summary of some of the common legal issues foreign companies should consider when establishing business operations in the U.S. Careful planning is very important for new subsidiaries, as prudent counsel in the early phases of formation can help avoid costly legal and tax problems later. Note that laws and rules change frequently in the dynamic U.S. legal system. The below is for informational purposes only and does not constitute legal advice. For further details regarding any of the discussed areas or legal advice specific to your situation, please contact us.
There are several types of entities used by domestic and foreign companies alike to conduct business in the U.S., including corporations, limited liability companies (LLCs), partnerships, limited partnerships, and branch offices. In order to select the most appropriate business entity, you must take into account the organizational structure of the existing business, tax considerations, and the particular type of activity the business intends to undertake in the U.S. Each type of entity requires distinct documentation and information for formation. In addition, it is possible for foreign corporations to conduct business in the United States without incorporating a new U.S. entity; however, taxation of such income in the U.S. depends on whether the activity constitutes a permanent establishment (see below for further discussion).
There are a range of taxes that affect U.S. companies. Upon the organization of a U.S. entity, such entity must apply to the Internal Revenue Service for an Employer Identification Number (which is used by the IRS to identify the company for federal taxation purpose), and also register with the relevant state’s department of taxation. Under most tax treaties, U.S. tax liabilities for a company arise if the company is deemed to be engaged in trade or business (to have a “permanent establishment”) in the U.S.
Key forms of taxation in the U.S. are income tax (for individuals), corporate tax (federal, often state, and sometimes city), sales and use tax, employee payroll and withholding tax, real property taxes, business license taxes, and miscellaneous taxes.
Corporate income taxes are assessed at the federal and, in most cases, state level. Federal corporate income tax rates depend on many factors, and range from 15% to 39%. State corporate income taxes vary by state. In New York, rates range from 7.5% to 9.0%. Sales tax (much like VAT in Europe) is assessed in many states on retail sales of property delivered in the state and leases of tangible personal property in the state. Sales tax rates and rules vary from state to state. Use tax generally applies to tangible personal property used, consumed, or stored in a state but purchased outside the state, which would have generated sales tax had the sale taken place in the state.
When an employer pays wages to employees, the employer must pay payroll taxes (e.g., social security, unemployment, workers’ compensation and statutory disability), withhold federal and state taxes from an employee’s gross pay and remit such taxes to the IRS and relevant state authority. In addition, counties and cities are authorized to assess property taxes on real and tangible personal property located within the county or city. Counties and cities in most states can also assess business license taxes on locally operated businesses. The amounts vary from jurisdiction to jurisdiction.
The employment laws of the federal government and many states are particularly favorable to employers, and do not typically require granting the comparatively extensive benefits often granted in other countries (e.g., generous severance or redundancy payments).
Federal laws governing management-labor relations generally relate to the creation of unions and conduct of an employer towards unionized employees. Federal laws also prohibit certain actions in the workplace, including sexual harassment and discrimination on the basis of factors such as race, color, religion, sex, or national origin (and, in certain cases, age).
State laws vary, but, like federal laws, tend to grant management a significant amount of flexibility to establish and terminate employees, provided that termination or denial of employment is not discriminatory under state or federal laws. Many states apply a common law doctrine stating that, in the absence of a formal contract or union agreement to the contrary, the employee can, with few exceptions, be terminated at any time with or without cause. New York does not mandate that any severance be paid to a terminated employee.
Neither federal law nor the laws of many states obligate an employer to provide benefits to its employees. However, because of competitive forces, it is common for employers to voluntarily provide certain employee benefits, such as medical insurance and retirement plans. Certain rules and laws, such as the Employment Retirement Income Security Act, govern this area. When an employer elects to provide benefits to its employees, the employer becomes subject to a number of federal and state requirements that may require the employer to continue coverage under those plans after an employee’s termination (e.g., health insurance coverage continuation at the employee’s expense, known as COBRA). The enactment of the Affordable Care Act will have an affect in this area.
Employee restrictions after termination, such as non-competition, non-solicitation and non-service of clients or customers, are recognized and enforced in many states, provided that the scope of the covenant is not overly broad based on its duration and the employee’s position. Some states (e.g., Florida) have statutes governing this area. Lastly, it is important for new U.S. businesses to be acutely aware of the distinctions between an employee and an independent contractor/1099 worker.
Intellectual property laws in the U.S. make certain important legal rights available to the owners of intellectual property. These rights can be valuable to operating businesses, raising capital, protecting brand value and pursuing exit strategies such as an IPO or acquisition. Methods for protecting intellectual property include registration of trademarks, copyrights, and patents. In addition, even if a technology or process cannot be protected under patent or copyright laws, it may be protectable under confidentiality agreements and trade secret laws. Registration of the intellectual property, however, can afford the registrant statutorily mandated benefits such as the possibility to recover attorneys’ fees, and even double or treble damages in some circumstances.
Written contracts range from complex, varied documents such as distribution and master services agreements to single-page agreements. The myriad issues to consider when reviewing a contract cannot be covered here. Nonetheless, when a subsidiary enters into a contract, it is important to review: the choice of law and venue provisions (which indicates the laws that will apply to the contract (e.g., the laws of a specific state or foreign nation) and where disputes will be resolved) and to liability provisions in order to limit the liability of the foreign parent, which can also be accomplished by having the U.S. subsidiary sign the agreements rather than the foreign parent. To assist with activity between affiliates, a business may wish to put certain inter-company agreements in place.
If any non-U.S. nationals will be actively participating in business in the United States, it is critical to consider immigration strategies. You must be aware that no person can enter the U.S. without appropriate documentation or status, or engage in employment in the U.S. without appropriate authorization. However, a foreign national may not necessarily need a visa to enter the U.S. Pursuant to the Visa Waiver Program, individuals from most Western European countries can enter the U.S. for limited business and tourist purposes for periods of up to 90 days, provided that they depart at the end of their authorized stay.
However, as the Visa Waiver Program will likely not suit most companies seeking to establish businesses in the U.S. on a long term basis, the visa categories best suited to business purposes in general are: B-1 (for short stays), H, E, and L. The B-1 visa is the most common nonimmigrant visa used by European individuals entering the U.S. for temporary business purposes. One can enter the U.S. in “B-1 status” by entering for temporary business purposes under the Visa Waiver Program or pursuant to a B-1 visa. This status requires that the visa holder is in the U.S. temporarily for business purposes (e.g., investigating opportunities, negotiating contracts, attending conferences, consulting with colleagues or establishing contacts) and is not gainfully employed in the U.S.. H visas are for professional workers, E visas apply to treaty traders and investors, and L visas are for intra-company transferees. E and L visas are most typically used by persons seeking to establish new offices or operations in the U.S. The U.S. government is currently considering serious immigration reform that will aid U.S. immigration.
We have experience of helping US and other international clients with setting up operations in the UK, along with helping facilitate the sale of international businesses to UK clients (and vice versa) and facilitating international investment in UK companies.
So far since 2009 we have assisted over 200 small or medium sized entities or start up companies with their set up and growing needs in the UK.