Land of opportunity or challenge? As the world's biggest economy, the United States of America is a magnet for foreign companies looking to invest overseas.
With a population of over 327 million, it offers a large consumer marketplace for domestic and overseas investments. The annual growth rate of U.S. GDP is 2.6% and with GDP at about $19.39 trillion in 2017, it represents 30% of all global economic activity.
But the size and scale of the country can also represent significant challenges to the unwary.
With 50 different states, the federal system means that legal requirements vary across state borders, so maintaining compliance can be a real hurdle to a business entering the market for the first time.
Understanding the requirements of doing business in the US is crucial to a successful business expansion strategy. Navigating the potential complexity is eased by the expertise of a reputable business service provider, such as TMF, to be able to rely on local knowledge of business start-up procedures, employment, tax, and legal requirements.
Establishing a presence
Careful focus needs to be given to establishing the most suitable business entity. Each state has its own rules for business entity creation as well as specific annual requirements for these entities to maintain their good standing.
The most common types of business entities are corporations, limited liability companies (LLCs), and partnerships. Each type has its own benefits and the choice depends on case-specific legal and business factors. Each type of business entity must be formed according to the laws of the state in which the entity is formed. All entity types other than partnerships require organising documents to be filed with the state government.
US law treats these business entities as 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. These are organised un-der state law and each state has its own rules. In the US, a corporation may be created under the laws of one state and have its principal place of business in a different state. It makes most sense to incor-porate in the state where the business intends to locate its operations. A certificate of incorporation must be filed with the Secretary of State in the chosen state. In most states, the shareholders elect di-rectors, who set company policy and elect officers. The directors of a US corporation can be foreign nationals and must be natural persons and not foreign companies. The internal structure and bylaws of corporations are similar across jurisdictions but can be customised to meet individual company needs.
The most common corporate form is a C-corporation, which is taxed at the corporate income tax rate separate from 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. This double taxation can be avoided by US companies by electing to be treated as an S-Corporation, which is a "pass though" entity for federal tax purposes. A foreign company, however, cannot elect to be treated as an S-Corporation.
Branch Office: a foreign entity can open a branch office in the US instead of conducting business through a US entity. As it represents an entire organisation operating in the US and is liable for taxation, it is not an advisable option unless a US attorney specifically recommends it.
Limited Liability Company: an LLC is run by 'members' who own the business. It can elect to be taxed as a corporation or to have income 'pass through' to members and be taxed at the member level. The personal liability of members is limited to their investments.
Partnerships: foreign companies can enter into partnerships by agreeing with another entity to do business together in the US. A written agreement is suggested, though it is not binding and can be formed by oral agreement or by conduct without any documentation or filing with the state.
Every new company operating in the U.S. is required to obtain an Employer Identification Number (EIN) from the Internal Revenue Service. This is needed for filing taxes and for company identification.
After thirty years, the United States has new income tax legislation. With a complex system of federal, state, and local levels of taxation, understanding business obligations can be overwhelming for newcomers to the system.
The recent enactment of US tax reform moves the United States from a 'worldwide' system to a 100% dividend exemption 'territorial' system, with significant implications for global businesses with US operations. Notable changes include:
- a new, permanently reduced US corporate rate 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 an additional corporate tax liability
- interest expense deduction limitations
- new 'hybrid' financing rule denying deductions for certain interest and royalties paid to related 'foreign' persons
- sale of partnership interest rules that affect a non-US partner's gain or loss from the sale or exchange of a partnership interest.
US corporations are susceptible to federal income taxes on all their income earned anywhere in the world. Foreign companies doing business in the US can experience 'transfer pricing' in which a foreign parent company may charges the US subsidiary high prices for goods or services. This can be investigated by the IRS and significant penalties may be imposed for non-compliance. It's 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 is needed.
Foreign individuals or entities conducting business in the US are also subject to the Foreign Investment in Real Property Tax Act (FIRPTA). This applies a tax to the disposition of real property in the country regardless of the taxpayer's residency or the existence of a 'permanent establishment' in the US.
Some areas of law, such as patent and copyright, are governed exclusively by federal law. Many other laws, including ones governing employment relationships, and sales transactions, are primarily set by individual states. Many other areas are governed by both federal and state law. When doing business in the US, foreign companies should understand that they are subject to these parallel systems of laws, which often differ from state to state.
Contracts are governed by state law. Usually, if parties enter into a written agreement, courts interpret that agreement 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, which generally applies to any contract for the sale of goods over $500. When interpreting such contracts, courts look to the UCC to address gaps that the parties did not address in their agreement.
All contracts must include a 'choice of law' clause stating the state's laws to apply, with a 'choice of venue' clause designating 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 US also has vigorous intellectual property laws, governing patents, copyrights, trademarks, and trade secrets.
Employment law needs careful clarification. Foreign business coming to the US must comply with US law when hiring employees who will be working in the US. US laws distinguish between "employees" and "independent contractors." 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, such as federal minimum wage. Companies doing business in the US need to be aware of these distinctions and accurately classify workers.
It can be difficult for a foreign entity to open a bank account in the US without a US presence. And even when a foreign individual or company has created a US entity, it is not unusual for banks in the US to be more willing to lend money to US businesses than to foreign entities. However, once a foreign business has been successfully doing business in the US for a while, that business often has increased access to capital through US banks.
All foreigners coming to the US to work must obtain permission to do so in the form of a visa. US visa laws are complicated and strictly federal, issued by the US embassy or consulate abroad. Individual states do not regulate or provide visas. Many types of visas, including most types of work visas, require approval from US Citizenship and Immigration Services.
It is important for foreigners to obtain the correct type of visa for their stay in the US. There are numerous employment categories for admission to the US and there are different categories for investors, for business visitors, and for sponsor-based employment. Many entities bringing a business to the US seek advice from a US attorney to make sure they select the correct visa category and avoid application mistakes. It is vital for foreign business owners and their workers to adhere to the terms of their own visa; violation can result in removal from the US or denial of re-entry into the US.
TMF Group in the United States, with offices in Miami, New York and San Francisco helps companies stay compliant with local regulations and filings – and has a proven track record in assisting businesses large and small to set up, or invest, in the USA with speed, safety and efficiency.
We have local experts providing financial, accounting, corporate secretarial, structured finance, legal, and HR and Payroll services across all the 50 states. Talk to us for in-depth knowledge that can help you succeed in the US.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.