Doing Business in the Central United States: A Guide to Foreign Investors
TABLE OF CONTENTS
I. GENERAL/LEGAL REGULATORY ENVIRONMENT
II. INVESTMENT INCENTIVES
III. CHOICE OF ENTITY
IV. ACQUISITIONS AND JOINT VENTURES
V. LABOR RELATIONS
VIII. PATENTS, TRADEMARKS, COPYRIGHTS AND TRADE SECRETS
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I. The US is very open to foreign investment.
The USA welcomes foreign investment. There are almost no barriers for non-US persons and companies to invest in the US or to start a business here. Foreign companies have the same freedom as US companies to establish US businesses.
U.S. businesses are organized under and are subject to the business laws of individual states. Federal (national) regulation is generally limited to securities and public company matters.
A foreign company can establish operations in the United States either by organizing a branch or subsidiary, or by acquiring an existing company. A branch is usually not the best method to start operations in the United States. Incorporation of a subsidiary can be accomplished quickly (in urgent cases, the same day).
The acquisition of an existing company can be accomplished in various ways, depending upon the size, number of shareholders, tax factors and business considerations. The law of most states makes available acquisition techniques that are somewhat analogous to those available in many foreign countries. The usual methods include acquisitions of shares or assets of the target corporation. Mergers are also permitted and easily accomplished.
II. Investment Incentives
Throughout the country, states, counties and cities offer an array of attractive investment incentives, including financing, training, technical assistance, site amenities and tax abatements. These incentives provide investors with meaningful inducements to locate and grow a business and create jobs. The Incentis Group, an affiliate of Frost Brown Todd, helps businesses maximize benefits from these sources (see www.incentisgroup.com).
III. Choice of Entity
A foreign investor seeking to do business in the USA must decide what legal form the investment will take. The basic choices are a sole proprietorship, general partnership, limited partnership, limited liability company and corporation.
A. Branch Office. One way for a foreign company to do business in the United States is to establish a branch. This simple process allows a company to take advantage of a state's legal system, but subjects it to state taxation on profits of the branch. For this reason, a foreign company normally will create a subsidiary rather than open a branch. Creating a subsidiary limits the parent company's liability, keeps it outside US jurisdiction and provides tax benefits.
B. Sole Proprietorship. The simplest form of business enterprise for individuals is a sole
proprietorship. The individual owns the business' assets directly and is completely responsible for its operations and liabilities. There are no special laws regulating sole proprietorships. While very easy to establish, a sole proprietorship is not advisable generally because the owner is exposed to unlimited liability.
C. General Partnership. A partnership is an association of two or more persons to carry on a business for profit as co-owners,. Partnerships do not require a written agreement, although written agreements are common and advisable. Partnerships are separate business entities regulated by state law. Partners share equally in profits and losses, and have equal rights to participate in the management and conduct of the business, unless they agree on some other arrangement. A general partnership has the disadvantage of unlimited liability of each general partner for all business debts.
D. Limited Partnership. A limited partnership is a business association that operates like a general partnership, but with the advantage of limited liability for certain participants. Limited partners do not engage in the day-to-day management of the business of the partnership, but hold a passive investment of money or other property in the partnership. A limited partner is not liable for partnership debts, but general partners are. Each limited partnership must have at least one general partner, but that partner can be a corporation or other entity. The general partners manage the day-to-day affairs of the business. Limited partners may not participate in management or operations; if they do, they may be considered general partners and have the same liability as a general partner. Limited partnerships must be established pursuant to a written limited partnership agreement, which details rights and responsibilities.
E. Limited Liability Company. A limited liability company is a relatively new type of legal entity with several advantages. It provides limited liability to owners, provides flexibility in management structure and has tax advantages. An "LLC" is formed by filing Articles of Organization with a state's Secretary of State. The members normally enter into an Operating Agreement that sets forth rules and procedures about company management, administration, accounting and tax matters. Like a corporation, a limited liability company is considered a legal entity separate and distinct from its members and has the capacity to conduct any type of business. This is the form of choice for most individuals starting a business or owning real estate together.
F. Corporation. Corporations are established and extensively regulated under state law. The advantages of a corporation are limited liability for all shareholders, continuity of existence regardless of the death of any shareholder, and certain federal and state tax advantages. A corporation is the form of choice for most foreign businesses starting a US subsidiary.
Certain formalities are needed to establish a corporation. These are simple and can be quickly accomplished (within a day). Once a corporation is created, it is a legal entity separate from its shareholders and has the capacity to acquire, own and use property, enter into contracts and otherwise
carry on business activities of any lawful nature. Debts that the corporation incurs are the responsibility of the corporation, and the shareholders, directors or officers are not personally responsible for these obligations (except in unusual circumstances). There are virtually no minimum capital requirements, and corporations do not have to declare publicly what their intended activities will be or who their owners are.
While shareholders own a corporation, they are not involved in day-to-day management. The board of directors, elected by the shareholders, has the legal responsibility for setting policy. The board of directors elects and gives authority to the officers. A president, vice president(s), secretary and treasurer are the normal officers of the corporation (they could all be the same person). While directors may act only as a board and not represent the corporation as individual directors (as is common in many other countries), a director may be an officer and represent the corporation in that capacity. Officers run day-to-day operation of a corporation, but significant corporate actions, such as substantial loans or the acquisition or sale of substantial assets, must generally be authorized by the directors and, in a few cases, by the shareholders.
IV. Acquisitions and Joint Ventures
A. Acquisitions. Instead of organizing a subsidiary or establishing a branch, a foreign investor may acquire the assets or securities of an existing business (the "target"). The acquisition may be done by (i) a purchase of the target's assets or securities for cash or securities of the foreign investor, or (ii) through merger. Important tax issues arise from how an acquisition is handled.
B. Joint Ventures. The term "joint venture" refers to an association of businesses or persons for the purpose of handling a specific activity. Joint ventures may be formed for a single, short-term business event or may contemplate a long-term relationship involving multiple transactions. A joint venture or strategic alliance may be a contract between parties or can be in the form of a legal entity. The US is generally a "freedom of contract" jurisdiction, leaving parties wide discretion in defining rights and responsibilities in a written agreement.
V. Labor Relations
Employers are subject to federal and state laws governing employee relations.
A. Fair Labor Standards Act. The Fair Labor Standards Act is the federal wage-hour law establishing minimum wage, equal pay, overtime pay and child labor restrictions. The 2004 federal minimum hourly wage is $5.15.
B. Equal Employment Laws. Numerous federal rules require that individuals have an
equal opportunity for employment. Title VII of the Civil Rights Act of 1964 forbids discrimination on the basis of race, color, sex (including pregnancy), religion or national origin. Under the Americans with Disabilities Act of 1990, discrimination is prohibited against a qualified individual with a disability, provided that the individual can perform the essential functions of the job. Under the Age Discrimination in Employment Act of 1967, it is unlawful to discriminate against job applicants or employees on account of age (if 40 years older). Under the Equal Pav Act of 1963, it is unlawful to pay workers of one sex at a rate different from that paid the other sex where the jobs in question involve equal skill, effort and responsibility, and are performed under similar working conditions.
C. Occupational Safety and Health Act. The Federal Occupational Safety and Health Act of 1970 requires subject employers to comply with safety and health standards covering workplace conditions. It requires employers to maintain their workplaces free from recognized hazards when no specific standard exists. The safety and health standards adopted under the Act govern general industry (e.g., stores, offices, factories, etc.), as well as the construction, maritime and agriculture sectors. The Occupational Safety and Health Administration, responsible for enforcing employers' obligations, regularly conduct surprise workplace inspections. Companies that violate the Act are subject to civil and, in severe cases, criminal penalties.
D. Workers Compensation. Nearly all states have in place a workers compensation law. Most employers pay a premium into a State Insurance Fund, which provides benefits to injured employees, based upon the employer's risk rating and payroll. Qualifying employers may self-insure against this risk.
E. Unemployment Compensation. Nearly all states have a system of unemployment compensation. This provides cash benefits to former employees who become unemployed through no fault of their own. Benefits are paid through contributions from employers subject to the Act.
F. National Labor Relations Act. The National Labor Relations Act governs relations between labor organizations and employers. It guarantees rights of employees not represented by a labor organization to engage in protected group activity without discrimination or retaliation. The Act regulates strike activity, picketing and boycotting of an employer's product or service.
G. Wrongful Discharge. It is not required that employees have written agreements, and most do not. Instead, they are generally "employees at will," meaning that they can leave at any time and they can be fired at any time (for any reason or for no reason). Employees may not, however, be fired for illegal reasons (such as race or sex or age discrimination).
- Contractual Theories. A discharged employee who claims wrongful termination can base a claim on breach of contract. Written or oral representations by management or company practice can create contractual rights. One should be careful in issuing employee handbooks, guidelines, practices and procedures to avoid the inadvertent creation of an employment "contract".
- Tort Theories. In addition to contract claims, a discharged employee may claim that the employer committed a tort - conduct that caused the employee to suffer economic injury. This typically takes the form of a "public policy" exception to the employment at will doctrine. Tort theories include defamation, intentional infliction of emotional distress, tortious interference with business relations and loss of consortium.
H. Employers With Government Contracts or Receiving Government Assistance. Employers with federal government contracts or that receive government assistance may have additional obligations, including: (i) adoption of affirmative action programs to advance minorities, women, veterans and disabled individuals, (ii) certification that the employer maintains a drug-free workplace, and (iii) payment of prevailing wages on public construction jobs.
I. Worker Adjustment and Retraining Notification Act (WARN). WARN is a federal law requiring employers to give written notice at least 60 days before a plant closing or mass layoff.
J. Employee Benefits. Federal law primarily governs the administration of employee benefits like pension and profit sharing plans, health plans, and group insurance continuation for discharged employees. There is wide discretion in what benefits are provided to employees, but once provided, the rules try to ensure that they are distributed and maintained fairly. The Family and Medical Leave Act of 1993 allows up to twelve weeks unpaid leave to parents for childbirth or adoption, childcare or a serious health condition of the employee or a spouse, child or parent.
K. Retaliation. Federal and state laws prohibit retaliation against employees for opposing employment practices which they believe in good faith are illegal, filing a discrimination claim, filing a workers' compensation claim, and for reporting certain alleged violations oflaw.
For information on federal labor law, see the US Labor Department's website at www.dol.gov.
VI. Immigration Laws
Those planning to start a business in the United States usually want to staff the operation in part with non-U.S. nationals. US immigration laws are complicated and strictly national.
A. Visitor for Business (B-1). A B-1 Business Visitor Visa allows a foreign national to come temporarily to the United States for business purposes. A B-1 visitor may not receive a salary from a U.S. employer and may not work in the United States as an independent consultant or contractor. The B-1 visitor must intend to return to a residence outside the USA, and his or her services must benefit an employer whose place of business is primarily outside the USA.
B. Treaty Trader (E-1). A foreign national may enter the USA temporarily under
a treaty of friendship, commerce and navigation solely to carry on trade, between the USA and the home country. A person who wants a treaty trader visa must work for an organization that is at least 51 % foreign-owned, and the employee must have supervisory or executive duties or have qualifications that make his or her services essential to the enterprise's efficient operation.
C. Treaty investor (E-2). A foreign national may enter the USA if he or she is coming to develop and direct the operations of a project in which he or she has invested a substantial amount of capital. Generally, the foreign national must be coming to develop and direct the operations. Highly trained technical and managerial personnel may receive treaty investor status if they work in management or are highly trained and specifically qualified technicians required in the USA for certain purposes.
D. Intracompany Transferee (L-1). The L-l intracompany transferee visa allows foreign nationals who have worked abroad as executives or managers, or were in positions requiring specialized knowledge, to transfer temporarily to a US company from an affiliate abroad. In most cases, the transferee must have worked abroad continuously for one year before applying for admission to the USA.
E. Specialty Occupation Worker (H-B). Members of specialty occupations coming
temporarily to the USA to perform professional-level work and those with substantial experience equivalent to a university-level degree may qualify for an H-B visa. The position that the foreign national will occupy must require the services of a member of the specialty. "Specialty occupations" almost always require a bachelor's degree or the equivalent. Specialty workers may remain continuously in the USA for up to six years.
F. Trainee (H-3). A foreign national coming temporarily to the USA for training may qualify for an H-3 training visa. H-3 allows training of foreign nationals who will resume their employment abroad. The category does not apply to medical training. A trainee cannot work unless it is necessary and incidental to the training and will not displace a U.S. resident. Training must be unavailable in the trainee's home country, and the trainee must not already be skilled in the area of the proposed training. The maximum stay is two years.
G. Extraordinary Ability (0-1). This category includes foreign nationals of extraordinary ability in the sciences, arts, education, business or athletics as demonstrated by "sustained national or international acclaim." The maximum length of stay varies, but is initially no more than three years.
A. Corporate Income Tax. All companies incorporated in the USA must pay federal tax on their worldwide income. Income tax rates vary with the amount of income earned. In addition to the regular tax, corporations may have to pay an alternative minimum tax, imposed on taxable income increased by tax preference and adjustment items. Corporations with 25% or more foreign ownership must provide US authorities with information about related party transactions. These include the 25% foreign shareholders and affiliated businesses.
Regardless of the state of incorporation, companies doing business in other states pay corporate income and/or franchise tax in those states. These taxes are based on income allocated and apportioned to reflect the company's business activity in each state.
Group tax relief is sometimes available. When a US corporation pays dividends to another US corporation, only part of the dividend is taxed as ordinary income. When US corporations have at least 80% common ownership, they can file a consolidated return and eliminate tax on intercompany dividends. Taxes are withheld on dividends, interest, rents, and royalties only when paid to a nonresident (other than a US citizen or resident), and only if the income is not effectively connected with a US trade or business.
B. Estimated Tax Payments. A corporation normally must pay 100% of its federal income tax liability through estimated taxes through quarterly installments during the year in which income is earned. Failure to make estimated payments results in penalties and interest.
C. Income Tax on Branches of Foreign Corporations. Branches of foreign corporations pay income tax at the regular federal corporate rates on US-source income and on any foreign-source income effectively connected with US business. In addition, the branch profits tax imposes a 30% tax on certain of a branch's deemed dividends and interest expense allocable to its effectively connected income. Because of the branch profits tax, most foreigners form corporations rather than branches.
D. Foreign Investment in Real Property Tax Act of 1980 (FIRPTA). Foreign persons owning interests in U.S. real property must pay federal tax on the sale of that property as if they were engaged in a U.S. trade or business, and must withhold 10% of the amount realized on sale. This amount is applied to the tax liability. Interests in certain domestic corporations that own US real property may be treated as US real property.
E. Tax Treatment of Partnerships. Generally, partnerships are not taxed, although they must file an information return. Profits or losses of a partnership are allocated to its partners. A limited liability company may choose to be taxed as either a corporation or a partnership. Most choose to be taxed as partnerships to avoid a second level of tax.
F. Sales Tax. The federal government levies no sales or value-added tax, but most states levy a tax on consumer sales transactions. Counties and municipalities often levy additional sales taxes. Sales taxes are similar to value-added taxes imposed by European countries, except that sales taxes are collected only at the retail sale and must be itemized as an addition to selling price.
G. Personal Property/Inventory Taxes. Most states levy a personal property tax. To compare tax rates between states, entities must account for differences in valuation formulas used to derive listing value.
VIII. Patents, Trademarks, Copyrights and Trade Secrets
A. Patents. The grant and enforcement of patents in the USA is governed exclusively by US federal law. Enforcement actions are heard in the federal courts. There are three basic types of patents: utility patents, design patents and plant patents. Utility patents may be granted for useful compositions of matter, processes, machines and articles of manufacture new and in nonobvious view of existing technology. Design patents may be granted on new and nonobvious ornamental designs of useful articles that are not primarily dictated by function. A design patent protects the appearance of an article, but not its structural or functional features. Plant patents cover novel asexually reproduced plant varieties. The Plant Variety Protection Act separately provides for registration and protection of sexually reproduced plant varieties. For patents filed after June 8, 1995, the patent term extends 20 years from the patent's date of filing for utility patents, and 14 years from grant date for design patents.
As a signatory to the Paris Convention and the Patent Cooperation Treaty (PCT), the USA will recognize the priority in an invention that is the subject of a patent application filed in another signatory country. The applicant must file an international PCT application within one year of the filing in a signatory country, followed by national patent application within up to 30 months (depending upon treaty provision elected) of the filing date of the first signatory country filing. The USA recognizes priority in inventions filed in the USA within one year of their first filing in other Paris Convention countries.
B. Trademarks. A trademark may be registered with the US Patent and Trademark Office. Before submitting an application, the trademark owner must use the mark in interstate commerce or have a bona fide intent to use the mark. An application based upon intent to use must later be supported by actual use within a statutory period. Under the Paris Convention, applicants may claim the benefit of the first filing date of an application for trademark registration in a signatory country in applications made in other countries within 6 months of the first filing date. Thus, US applicants can claim the benefit of a US filing date in other Paris Convention countries, and foreign applicants can claim the benefit of their foreign filing dates in US applications.
C. Copyrights. US copyright laws protect a wide variety of artistic and author works, including texts, sculpture, sound recordings, compilations, computer programs, semiconductor chips and industrial designs. Copyright laws are exclusively federal and provide remedies against unauthorized copying of any substantial portion of a copyrighted work. Copyrights for new works extend 70 years beyond the author's life. For works "made for hire" or anonymous works, the copyright extends for 95 years from the date of first publication, or 120 years from the date of creation (whichever expires first). Copyrights require a specific written contract with specific written language.
D. Trade Secrets. Trade secrets are generally governed by state law, although many states have passed a version of the Uniform Trade Secrets Act. Under the Act, "trade secrecy" means information (including any scientific or technical information, design, process, procedure, formula, pattern, compilation, program, device, method, technique or improvement, or any business or financial information or plans, or listing of names, addresses or telephone numbers) that both:
- derives independent economic value from not being generally known to, and not being ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and
- is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.
IX. Environmental Laws
Companies must comply with a wide array of federal, state and local environmental laws. Federal laws regulate air and water pollution, pesticides, solid and hazardous waste management and chemical manufacturing and storage. Companies must pay for cleanup of "toxic dumps". Virtually every state has adopted similar environmental legislation. The US Environmental Protection Agency (USEP A) is primarily responsible for implementing and enforcing federal environmental laws, while state environmental agencies enforce laws at the state level. All agencies have broad authority to issue regulations. Often, companies must obtain permits to operate facilities that pollute and may need to buy pollution control equipment or technology. Some states have tax incentives to encourage spending on environmental technology, and laws encourage clean up of environmentally-impaired properties.
X. Antitrust Laws
All firms investing or conducting business in the United States are subject to US antitrust laws. These laws protect competition in the market for products and services. In general, antitrust laws prohibit unreasonable restraints on trade, monopolization, price discrimination, unfair methods of competition, and unfair or deceptive practices affecting commerce. Antitrust laws apply to import trade into the USA, and to export trade and purely extraterritorial foreign trade activity that has a "direct substantial and reasonably foreseeable effect" on US trade. Foreign companies must provide certain notices if they acquire voting securities or assets of US companies.
XI. Banking Laws
Regulation U of the Federal Reserve Board restricts the extension of credit by US banks in connection with "margin securities". A list of what constitute "margin securities" is published by the US government. It includes most equities traded on major US exchanges. Regulation U limits the ability of a foreign investor to finance an acquisition using US sources of credit by securing the financing with the securities of the target company.
XII. Securities Matters
Companies issuing or distributing securities to the public (including stocks, debt issues, limited partnership interests, and a wide variety of pooled investment vehicles) must make certain disclosures and file materials with the US Securities and Exchange Commission (SEC). Federal law is based on two primary statutes, the Securities Act of 1933 and the Securities Exchange Act of 1934, and rules adopted by the SEe. Companies issuing securities and others involved in the sale of securities must accurately disclose all information that a reasonable investor would want to know before making an investment decision. Failure to do so violates federal and state law and may result in civil and criminal penalties. For a foreign investor setting up a wholly owned subsidiary, these laws are not an issue. There are exemptions from registration for accredited investors (institutions and individuals with high net worth, income and sophistication). Differences in accounting standards around the world must be considered by foreign investors. The USA uses a particular form of generally accepted accounting principles (GAAP), and if this requires careful consideration of companies that use international or other accounting standards that differ from US GAAP. Companies issuing securities must also comply with state laws where they are incorporated and where securities purchasers live.
Growing enterprises often use stock option or profit sharing plans and other techniques that reward key employees for company profitability. These often have securities implications. Because of the stringent remedies that apply if an error occurs in issuing securities, companies should consult with counsel before committing to a particular form of equity investment.