Successfully establishing and growing a business in the U.S. comes with a wealth of opportunities, but it also requires navigating a complex legal, regulatory, and operational landscape.
DOING
IN THE U.S.
A GUIDE FOR FOREIGN COMPANIES OPERATING IN THE U.S.
Table of Contents
1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2. Entry Strategies: ShouldYou Form a U.S. Entity? . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.1. Direct Market Entry: Operating Through a Branch, Agent, or Distributor . . . . . . . . . . . . . 7 2.2. Establishing a U.S. Entity: Setting Up a Wholly Owned Subsidiary . . . . . . . . . . . . . . . . 7 2.3. Acquiring an Existing Business: Buying Assets or Shares of a U.S. Company . . . . . . . . . . 7 2.4. Licensing or Franchising: Partnering With a U.S. Company Without Direct Presence . . . . . . . 8 3. Direct Market Entry: Operating through a Branch, Agent, or Distributor . . . . . . . . . . . . . . 10 3.1. BranchOffice........................................... 10 3.2. IndependentSalesAgent..................................... 10 3.3. DistributorAgreements...................................... 11 3.4. RegulatoryandLicensingConsiderations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 3.5. ComparisontoEstablishingaU.S.Entity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 4. Establishing a U.S. Entity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 4.1. TypesofBusinessEntities .................................... 14 4.2. Incorporation Process and Legal Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . 15 4.3. Execution Formalities and Legal Documentation . . . . . . . . . . . . . . . . . . . . . . . . . 21 5. Investing in an Existing U.S. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 5.1. Advantages and Disadvantages of Investing in a U.S. Business . . . . . . . . . . . . . . . . . 24 5.2. Equityvs.AssetPurchases.................................... 24 5.3. FranchiseandLicensingAgreements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 5.4. Regulatory Requirements and Qualified Investors . . . . . . . . . . . . . . . . . . . . . . . . 25 6. Intellectual Property Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 6.1. International IP Protection and U.S. Market Entry . . . . . . . . . . . . . . . . . . . . . . . . . 30 6.2. PatentProtection......................................... 31 6.3. TrademarkRegistration...................................... 31 6.4. Copyrights............................................. 32 6.5. Trade Secrets and Confidential Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 7. Labor Law Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 7.1. WageandHourLaws....................................... 34 7.2. Worker Protections and Anti-Discrimination Laws . . . . . . . . . . . . . . . . . . . . . . . . 34 7.3. HealthInsuranceandEmployeeBenefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
7.4. Employment Contracts and At-Will Employment . . . . . . . . . . . . . . . . . . . . . . . . . 35 7.5. Worker Classification: Employees vs. Independent Contractors . . . . . . . . . . . . . . . . . 35 8. Legal System and Litigation Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 8.1. CanForeignBusinessesBeSuedintheU.S.? . . . . . . . . . . . . . . . . . . . . . . . . . . 37 8.2. U.S. Court System: Federal vs. State Jurisdiction . . . . . . . . . . . . . . . . . . . . . . . . . 37 8.3. Choice of Forum and Governing Law in Contracts . . . . . . . . . . . . . . . . . . . . . . . . 38 8.4. LitigationCostsandTimeline................................... 39 8.5. Alternative Dispute Resolution (ADR): Arbitration and Mediation . . . . . . . . . . . . . . . . . 39 9. Foreign Investment Restrictions and Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . 42 9.1. RealEstateOwnershipRestrictions................................ 42 9.2. OFACandSanctionsCompliance................................. 42 9.3. Committee on Foreign Investment in the U.S. (CFIUS) Review . . . . . . . . . . . . . . . . . . 42 9.4. Nationality and Residency Requirements for Business Owners . . . . . . . . . . . . . . . . . 43 9.5. Public Disclosure and Reporting Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 10. Immigration Options for Investors, Employers, and Employees . . . . . . . . . . . . . . . . . . 45 10.1. InvestorVisas........................................... 45 10.2. Employment-Based Visas for Business Owners and Self-Employed Individuals . . . . . . . . . 46 10.3. Employment-Based Visas for Companies Hiring Foreign Workers . . . . . . . . . . . . . . . . . 47 10.4. ImmigrationandWorkAuthorization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 10.5. Termination, Severance, and Unemployment Insurance . . . . . . . . . . . . . . . . . . . . . 48 10.6.KeyResourcesforEmployers................................... 48 11. Closing a Business and Exit Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 11.1. DissolutionProcess........................................ 51 11.2. AssetLiquidationandTaxFilings................................. 51 11.3. Repatriation of Funds and Regulatory Considerations . . . . . . . . . . . . . . . . . . . . . . . 51 12. Restructuring and Bankruptcy Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 12.1. Chapter7(Liquidation) ...................................... 53 12.2.Chapter11(Reorganization).................................... 53 12.3.Chapter13(WageEarner’sPlan)................................. 53 12.4. Chapter15(Cross-BorderInsolvency). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 12.5. Can Foreign Investors File for Bankruptcy or Restructuring in the U.S.? . . . . . . . . . . . . . 53 12.6. Advantages of Filing for Bankruptcy in the U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . 54 12.7. Does a U.S. Bankruptcy Filing Have Effects in Other Countries? . . . . . . . . . . . . . . . . . 54 12.8. Can Foreign Assets Be Included in a U.S. Bankruptcy Filing? . . . . . . . . . . . . . . . . . . . 54 12.9. What If a Foreign Investor Files for Bankruptcy in Another Country? Will the U.S. Recognize It? 54
13. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
ONE ectio
INTRODUCTION
1. INTRODUCTION Successfully establishing and growing a business in the U.S. comes with a wealth of opportunities, but it also requires navigating a complex legal, regulatory, and operational landscape. The United States offers a business-friendly environment with strong legal protections, access to capital, and a dynamic consumer base, but success depends on careful planning and compliance with local laws. The team at Shumaker, Loop and Kendrick, LLP has prepared this guide to provide foreign investors and businesses with a comprehensive overview of the key considerations for doing business in the U.S., including entry strategies, corporate structures, tax implications, labor laws, intellectual property protections, dispute resolution mechanisms, and immigration options. However, we understand that every business has unique circumstances and objectives. Our team is available to assess your specific needs and support you in developing and implementing the best strategy for your expansion into the U.S. market. Whether you are launching a new venture, acquiring an existing company, or expanding operations, understanding the legal and practical aspects of the U.S. business environment is crucial. Throughout this guide, we outline essential steps, best practices, and potential pitfalls, ensuring that businesses are well-positioned for success in one of the world’s most competitive markets.
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TWO ectio
ENTRY STRATEGIES: SHOULD YOU FORM A U.S. ENTITY?
2. ENTRY STRATEGIES: SHOULD YOU FORM A U.S. ENTITY? Expanding into the U.S. market is a significant decision for any foreign business, requiring careful consideration of the most effective market entry strategy. Each approach carries unique advantages and challenges related to taxation, liability, regulatory requirements, and operational flexibility. The right choice depends on factors such as the level of control desired, the industry in which the business operates, and the long-term goals of expansion. Foreign businesses have several options to enter the U.S. market, each offering different levels of involvement, risk, and complexity. Whether establishing a legal entity or partnering with an existing U.S. firm, understanding these options is crucial for making an informed decision. 2.1 Direct Market Entry: OperatingThrough a Branch, Agent, or Distributor Direct market entry allows foreign businesses to sell their products or services in the U.S. without setting up a separate legal entity. This is commonly done through a branch office, an independent sales agent, or a distribution agreement. A branch office represents the parent company directly and can be subject to U.S. taxation and regulatory requirements. Agents and distributors, on the other hand, facilitate sales on behalf of the foreign company, helping navigate local market conditions while minimizing operational risks. However, reliance on third-party entities may limit control over pricing, branding, and customer relationships. Additionally, some states, such as California, New York, and Florida, require foreign businesses engaging in direct market activities to register and obtain business licenses, depending on the industry and scale of operations. 2.2 Establishing a U.S. Entity: Setting Up a Wholly Owned Subsidiary Creating a U.S. entity, such as a corporation or a limited liability company (LLC), provides a foreign business with full control over operations while shielding the parent company from direct liability. A subsidiary is treated as a separate legal entity, subject to U.S. corporate taxation and compliance regulations. This approach is ideal for businesses looking to establish a long-term presence, hire employees, and build brand identity in the U.S. market. Choosing between a corporation and an LLC depends on tax and governance considerations—corporations provide better access to external investment, while LLCs offer tax flexibility through pass-through taxation. However, forming a U.S. entity requires compliance with state and federal registration processes, ongoing reporting obligations, and adherence to employment and business regulations. 2.3 Acquiring an Existing Business: Buying Assets or Shares of a U.S. Company Acquiring an existing business can be an efficient way to enter the U.S. market, providing immediate access to an established customer base, operational infrastructure, and local expertise. Foreign investors can acquire a company by purchasing its assets or shares. An asset purchase allows buyers to select specific parts of a business, such as intellectual property, equipment, or contracts, while minimizing liabilities tied to the previous owner.
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A stock purchase involves taking over an entire company, including its existing liabilities, employees, and operational structure. Due diligence is crucial to assess financial health, legal compliance, and potential risks before completing a transaction. Additionally, foreign investments in certain industries may require regulatory approval, particularly if they involve critical infrastructure, defense, or technology sectors. 2.4 Licensing or Franchising: Partnering With a U.S. Company Without Direct Presence Licensing and franchising provide foreign businesses with a way to generate revenue in the U.S. without direct ownership or operational control. Licensing agreements allow U.S. companies to use foreign intellectual property, trademarks, or proprietary technology in exchange for royalties. This model reduces financial risk and regulatory burden while expanding brand presence in the market. Franchising, on the other hand, involves a structured business model where franchisees operate under the brand and guidelines of the foreign business, paying fees or royalties in return. While both options can provide rapid market penetration, they also require strong contractual agreements to ensure brand consistency, intellectual property protection, and compliance with U.S. franchise laws. Each entry strategy presents unique benefits and challenges. Foreign businesses must assess their risk tolerance, level of operational control, tax exposure, and long-term business objectives before deciding on the best approach for entering the U.S. market. This guide will further explore key aspects of these options, helping businesses make well-informed decisions.
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THREE ectio
DIRECT MARKET ENTRY: OPERATING THROUGH A BRANCH, AGENT, OR DISTRIBUTOR
3. DIRECT MARKET ENTRY: OPERATING THROUGH A BRANCH, AGENT, OR DISTRIBUTOR Foreign businesses seeking to sell products or services in the U.S. without establishing a separate legal entity can explore direct market entry through a branch office, independent sales agent, or distributor. Each option has distinct legal, tax, and operational considerations, making it essential for companies to evaluate the best approach based on their business model and industry. 3.1. Branch Office A branch office is an extension of the foreign parent company operating directly in the U.S. It is not a separate legal entity but rather a foreign company’s local presence in the market.
3.1.1 Formation Requirements
(i) Register as a foreign entity with the Secretary of State in each state where business is conducted. (ii) Obtain an Employer Identification Number (EIN) from the Internal Revenue Service (IRS) for tax purposes.
(iii) D esignate a registered agent for receiving legal and tax documents.
(iv) Comply with state and local business license requirements (varies by state; California, New York, and Florida have stringent rules).
(v) File for Foreign Qualification if operating across multiple states.
3.1.2 Advantages
(i) Full control over business operations, branding, and pricing.
(ii) Direct management of customer relationships and market strategy.
3.1.3 Disadvantages
(i) Subject to U.S. taxation on income generated in the country.
(ii) May trigger permanent establishment (PE) status, leading to additional compliance burdens. (iii) R equired to register with state and local authorities where it conducts business, often necessitating a business license in states like California, New York, and Florida. 3.2 Independent Sales Agent An independent sales agent is a third-party representative who facilitates sales for a foreign company without assuming ownership of goods or services. The agent earns a commission on sales but does not bear inventory or operational risks.
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3.2.1 Formation Requirements (i)
D raft a Sales Agency Agreement outlining commission structure, exclusivity terms, and termination clauses. (ii) E nsure compliance with Federal Trade Commission (FTC) regulations regarding fair trade practices. (iii) V erify state-specific sales and business licensing requirements for independent agents.
3.2.2 Advantages (i)
Lower upfront costs compared to establishing a branch or subsidiary.
(ii) R educes administrative and tax burdens since the agent is responsible for its own tax filings.
3.2.3 Disadvantages (i)
Less control over pricing, branding, and customer relationships.
(ii) Success depends on the agent’s commitment and market expertise.
(iii) C ontractual agreements must clearly define exclusivity, commission structures, and performance expectations.
3.3 Distributor Agreements A distributor purchases products from the foreign company and resells them in the U.S. market, often handling marketing, warehousing, and customer service.
3.3.1 Formation Requirements (i)
N egotiate and execute a Distributor Agreement specifying pricing, territorial rights, and branding terms. (ii) E nsure compliance with Uniform Commercial Code (UCC) regulations governing commercial sales in the U.S. (iii) A ssess potential antitrust laws to avoid exclusivity clauses that may violate competition laws.
3.3.2 Advantages (i)
Provides rapid access to established distribution networks.
(ii) R educes regulatory, tax, and operational responsibilities for the foreign company.
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3.3.3 Disadvantages
(i) Foreign businesses relinquish direct control over sales and marketing.
(ii) Distributor agreements may limit pricing flexibility and brand positioning.
(iii) C ontractual restrictions may affect termination rights or the ability to change distribution strategies.
3.4 Regulatory and Licensing Considerations Many states require foreign businesses conducting direct market activities to register and obtain a business license or file for foreign qualification with the state’s Secretary of State. Additionally, businesses may need to:
(i) Register with the Department of Revenue for state tax obligations.
(ii) Obtain federal product approvals if selling regulated goods (e.g., FDA approval for pharmaceuticals, FCC compliance for telecommunications products). (iii) A dhere to intellectual property protections by registering trademarks with the United States Patent and Trademark Office (USPTO). 3.5 Comparison to Establishing a U.S. Entity Businesses considering direct market entry should compare this approach with establishing a separate U.S. entity (discussed in the Establishing a U.S. Entity chapter). While direct market entry minimizes initial costs and administrative burdens, it may limit growth potential and expose the foreign company to greater tax and liability risks. Companies planning long-term operations in the U.S. may find forming a subsidiary (LLC or Corporation) more advantageous in terms of legal protections and scalability.
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FOUR ectio
ESTABLISHING A U.S. ENTITY
4. ESTABLISHING A U.S. ENTITY Once a foreign business decides to set up a U.S. entity, several key factors must be considered. Establishing a legal entity in the U.S. provides operational control, limits liability, and allows access to the local banking system and workforce. However, it also requires compliance with tax laws, corporate governance rules, and state regulations. The following sections outline essential aspects of forming and operating a U.S. entity. 4.1 Types of Business Entities Choosing the appropriate business entity is one of the most critical decisions when establishing a U.S. company. The entity type determines liability protection, taxation, governance structure, and investor appeal. Each structure offers unique benefits and potential drawbacks, depending on business goals, ownership structure, and regulatory considerations. Below are the primary business entity types available in the U.S., along with their key characteristics. 4.1.1 C Corporation (C Corp) A C Corporation is a separate legal entity from its owners, providing limited liability protection to shareholders. This structure is commonly used by businesses seeking outside investment, particularly venture capital and public offerings. One notable aspect of a C Corp is the double taxation system: the corporation pays corporate income tax (currently 21% at the federal level), and shareholders are taxed again on dividends. However, retained earnings within the company are not immediately taxed at the shareholder level, allowing reinvestment without immediate additional tax burdens. C Corps also offer flexibility in ownership, as there are no restrictions on the number or type of shareholders, making them ideal for large-scale operations and multinational business expansion. 4.1.2 S Corporation (S Corp) An S Corporation is a special tax designation available to qualifying small businesses. Unlike C Corps, S Corps are pass-through entities, meaning business income, deductions, and credits pass through to shareholders, who report them on their individual tax returns. This structure avoids double taxation while still providing limited liability protection. However, there are strict requirements: an S Corp can have no more than 100 shareholders, all of whom must be U.S. citizens or residents. Additionally, it can issue only one class of stock, which may limit investment opportunities. Despite these restrictions, S Corps are often a preferred option for small to mid-sized businesses looking for tax efficiencies while maintaining a corporate structure. 4.1.3 Limited Liability Company (LLC) A Limited Liability Company (LLC) is one of the most flexible business entities in the U.S., combining elements of both corporations and partnerships. LLCs provide limited liability protection to their owners (members) while offering the option to be taxed as a
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sole proprietorship, partnership, or corporation. By default, an LLC is treated as a pass-through entity, meaning profits and losses flow directly to members without entity level taxation. However, an LLC can elect to be taxed as a C Corporation if desired. Unlike corporations, LLCs do not have strict management requirements— members can manage the company themselves or appoint managers. This structure is particularly attractive for small and medium-sized businesses, real estate ventures, and professional service firms due to its operational flexibility and simplified compliance requirements.
4.1.4 Partnerships
Partnerships are business structures in which two or more individuals or entities share ownership, profits, and liabilities. There are several types of partnerships, each with different levels of liability and management control: (i) General Partnership (GP): In a GP, all partners share equal responsibility for management and liabilities. This structure is easy to form and offers tax simplicity but provides no liability protection—each partner is personally responsible for business debts and obligations. (ii) Limited Partnership (LP): An LP consists of at least one general partner (who manages the business and assumes full liability) and one or more limited
partners (who invest in the business but have limited liability). LPs are commonly used for investment funds and real estate projects.
(iii) Limited Liability Partnership (LLP): LLPs are typically used by professional service firms, such as law and accounting firms. All partners have limited liability, meaning they are not personally responsible for the actions of other partners. (iv) Limited Liability Limited Partnership (LLLP): An LLLP is an extension of an LP, offering limited liability protection to both general and limited partners. This structure is not available in all states but is useful for businesses seeking to limit liability exposure for all partners.
4.2 Incorporation Process and Legal Requirements Establishing a business entity in the U.S. requires compliance with both state and federal regulations. Each business structure—C Corporation, S Corporation, Limited Liability Company (LLC), and Partnerships—follows a distinct incorporation process with varying legal requirements. Below is an overview of the incorporation steps and governance considerations for each entity type.
4.2.1 Filing Incorporation Documents with the Secretary of State
The first step in forming a business entity is filing the appropriate formation documents with the Secretary of State in the chosen jurisdiction: (i) Corporation and S Corporation: Must file Articles of Incorporation (or Certificate of Incorporation in some states). These documents outline essential
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company details, including the corporate name, number of authorized shares, registered agent information, and business purpose. (ii) LLC: Must file Articles of Organization (or Certificate of Formation). This document sets out the company’s name, registered agent, and management structure (member-managed or manager-managed). (iii) Partnerships: a) General Partnership (GP): Typically, does not require formal filing, but partners may choose to file a Partnership Agreement. b) Limited Partnership (LP): Must file a Certificate of Limited Partnership, designating at least one general partner and one limited partner. c) Limited Liability Partnership (LLP) and Limited Liability Limited Partnership (LLLP): Must file registration documents with the state to obtain limited liability protection for partners. 4.2.2 Registered Agent Requirement A registered agent is a designated person or service authorized to receive legal and tax documents on behalf of the company. The registered agent must have a physical address in the state of incorporation and be available during regular business hours. (i) Corporations (C and S Corps): Required in all states; typically, businesses hire professional registered agent services to ensure compliance. a) LLCs: Required in most states; can be an individual or a professional service provider. b) Partnerships: Required for LLPs and LLLPs, but not typically required for GPs and LPs unless mandated by state law.
4.2.3 Capitalization Requirements
Unlike some other countries, the U.S. does not impose a minimum capital requirement for business entities. However, proper capitalization is essential to maintain financial stability and reinforce liability protections. (i) C and S Corporations: While there is no minimum requirement, corporations must issue shares to shareholders. Delaware and some other states require corporations to define a par value for their shares. (ii) LLCs: No formal capitalization requirements exist, but members contribute capital based on their ownership agreements. (iii) Partnerships: Partners contribute capital in cash, property, or services as outlined in the partnership agreement. Limited partners in an LP or LLLP are only liable for debts up to their contributed amount.
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4.2.4 Corporate Governance and Compliance Requirements Corporate governance refers to the structure, policies, and procedures that guide the management and decision-making processes of a business entity. Compliance involves adhering to state and federal regulations, ensuring transparency, accountability, and legal protection for stakeholders. Each entity type has different governance and compliance obligations: (i) Corporations (C and S Corps). Corporations must follow formal governance structures, requiring a Board of Directors to oversee operations and officers (such as CEO, CFO, and Secretary) to manage daily activities. They must hold an annual shareholders meeting and regular board meetings, document meeting minutes, and maintain corporate records. Failure to comply can lead to loss of liability protections. Additionally, publicly traded corporations face strict Securities and Exchange Commission (SEC) reporting requirements, while privately held corporations have fewer disclosure obligations but may still need to file annual reports with the state. (ii) Limited Liability Companies (LLCs). LLCs offer greater flexibility in governance. They can be managed by members (owners) or appointed managers, as specified in the Operating Agreement. Unlike corporations, LLCs are not required to hold formal meetings or maintain extensive records, though it is advisable to do so to reinforce liability protection. Some states mandate periodic filings, such as an Annual Report, but LLCs generally have fewer compliance requirements than corporations. (iii) Partnerships (GPs, LPs, LLPs, LLLPs). Governance in partnerships is dictated by the Partnership Agreement, which defines each partner’s rights, responsibilities, and profit-sharing arrangements. General Partnerships (GPs) do not require formal governance structures, but Limited Partnerships (LPs) and Limited Liability Partnerships (LLPs) must file periodic reports with state agencies. Limited Liability Limited Partnerships (LLLPs) provide liability protection for general partners but require additional compliance filings. 4.2.5 Taxation and Filings Taxation in the U.S. varies by business entity type, impacting how income is reported, taxed, and distributed to owners. Businesses must comply with federal, state, and sometimes local tax regulations. Certain entities, like corporations, are subject to direct taxation, while others, like LLCs and S Corporations, allow income to pass through to owners’ personal tax returns. Additionally, businesses must adhere to ongoing filing obligations, including income tax returns, payroll tax reporting, and regulatory compliance filings. (i) Corporate Taxation (C Corporations). C Corporations are subject to a 21% federal corporate tax rate, plus applicable state and local taxes, which vary by jurisdiction. Unlike pass-through entities, C Corps experience double taxation, where profits are taxed at the corporate level and again when distributed to shareholders as dividends. However, retained earnings within the corporation
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are not immediately taxed at the shareholder level, allowing businesses to reinvest profits without incurring additional tax burdens. (ii) Pass-Through Taxation (S Corporations, LLCs, and Partnerships). S Corporations, LLCs, and Partnerships benefit from pass-through taxation, meaning business profits and losses are reported on the owners’ personal tax returns rather than being taxed at the entity level. This avoids double taxation and can lead to tax savings for small to mid-sized businesses. a) S Corporations must meet specific IRS eligibility requirements, including a cap of 100 shareholders, all of whom must be U.S. citizens or residents. They file Form 1120-S, and shareholders report their portion of profits or losses on Schedule K-1. b) LLCs are taxed as sole proprietorships (if single-member) or partnerships (if multi-member) by default but may elect to be taxed as an S Corp or C Corp for strategic tax planning. Multi-member LLCs file Form 1065, and members report their earnings on Schedule K-1. c) Partnerships (General, Limited, LLPs, and LLLPs) do not pay corporate taxes. Instead, income is passed through to partners, who report it on their personal tax returns. Partnerships must file Form 1065 and issue Schedule K-1 to each partner, detailing their share of profits and losses. Certain partnership types, such as LLPs and LLLPs, may have additional state tax filing requirements. (iii) Annual Tax Filings and Payroll Obligations. All business entities must file annual tax returns with the IRS and applicable state agencies. Corporations submit Form 1120 (C Corps) or Form 1120-S (S Corps), while LLCs and partnerships typically file Form 1065 unless they elect corporate taxation. Additionally, businesses with employees must withhold and remit payroll taxes, including Social Security, Medicare, and unemployment taxes, filing quarterly payroll reports (Form 941) and annual wage statements (Form W-2 and Form 1099 for contractors). (iv) Foreign Shareholder Tax Considerations. Foreign shareholders receiving dividends from a U.S. corporation may be subject to a 30% withholding tax unless reduced or eliminated under a tax treaty between the U.S. and the shareholder’s country of residence. The specific treaty terms dictate the final withholding rate, and foreign owners must file IRS Form W-8BEN to claim treaty benefits. Foreign partners in a U.S. partnership are subject to effectively connected income (ECI) taxation, meaning they must file U.S. tax returns and may have federal withholding obligations under Section 1446 of the Internal Revenue Code. Partnerships with foreign partners are required to withhold and remit estimated tax payments on behalf of non-U.S. partners.
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4.2.6 Physical and Virtual Presence Requirements When establishing a business in the U.S., companies must meet certain physical and administrative presence requirements. While some states have strict regulations regarding a registered office and corporate officers, others allow businesses to operate with minimal physical presence, leveraging third-party services for compliance. Below are key considerations regarding registered offices, corporate secretaries, banking requirements, and legal representation. (i) Registered Office Requirement. A registered office is a physical location within the state of incorporation where official documents, such as legal notices and government correspondence, are sent. This address must be a physical location and cannot be a post-office box or other virtual location. Many businesses use third-party registered agents to fulfill this requirement, especially when they do not have a physical office in the state. (ii) Corporate Secretary Requirements. A corporate secretary is responsible for maintaining company records, ensuring compliance with corporate laws, and handling governance matters such as preparing meeting minutes and filing required documents. While most states do not mandate a corporate secretary, as Delaware, some, such as California, require corporations to appoint one. Even when not legally required, appointing a corporate secretary is considered a best practice for corporate governance. (iii) Banking Requirements: Employer Identification Number (EIN) and KYC Compliance. To open a U.S. bank account, businesses must obtain an Employer Identification Number (EIN) from the IRS. The EIN serves as a unique identifier for tax and banking purposes, similar to a Social Security Number, but for businesses. Additionally, banks require compliance with Know Your Customer (KYC) regulations, which involve verifying the business’s identity, ownership structure, and financial activities. This process ensures that businesses are not engaged in fraudulent or illegal activities and typically requires submission of formation documents, proof of business operations, and identification of company owners. It may also include screening the business and its owners against government-issued restricted party lists, such as those maintained by the Office of Foreign Assets Control (OFAC). (iv) Third-Party Registered Agents and Legal Representation. Most states allow businesses to use third-party registered agents to fulfill legal representation requirements. These agents receive and forward legal documents, helping businesses maintain compliance without requiring a physical office in the state. Registered agent services are offered by specialized firms, law firms, and corporate service providers. This service is particularly useful for foreign-owned businesses or companies incorporated in states where they do not have a physical presence.
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4.2.7 Licensing and Regulatory Compliance Operating a business in the U.S. requires adherence to various licensing and regulatory requirements, which vary depending on industry, location, and business activities. Companies must ensure they obtain the necessary permits to operate legally and comply with federal, state, and local regulations. Below are key areas of licensing and regulatory compliance that businesses must consider. (i) Business Licenses and Permits. The types of licenses and permits required depend on the nature of the business and where it operates. Some of the most commonly required licenses include: a) General Business Licenses: Many cities and states require businesses to obtain a general operating license to conduct commercial activities within their jurisdiction. b) Professional Licenses: Certain professions, such as legal services, accounting, real estate, and healthcare, require state-issued professional licenses. c) Health and Safety Permits: Businesses in food service, manufacturing, and construction must obtain health department permits, fire safety approvals, and OSHA (Occupational Safety and Health Administration) compliance certifications. d) Environmental Permits: Companies involved in manufacturing, waste disposal, or industries that impact the environment may need permits from the Environmental Protection Agency (EPA) or state environmental agencies. e) Sales Tax Permits: Businesses selling goods or taxable services must register for a sales tax permit with state tax authorities.
4.2.8 Regulated Industries and Compliance Requirements
Certain industries are highly regulated due to the nature of their operations and potential risks to consumers and national security. Businesses in these sectors must comply with industry-specific laws and may require additional federal and state oversight: (i) Finance and Banking: Subject to regulations from the Securities and Exchange Commission (SEC), the Financial Crimes Enforcement Network (FinCEN), and the Federal Reserve. Compliance includes anti-money laundering (AML) laws, financial reporting obligations, and capital requirements. (ii) Healthcare and Pharmaceuticals: Regulated by agencies such as the Food and Drug Administration (FDA) and the Department of Health and Human Services (HHS). Businesses must comply with the Health Insurance Portability and Accountability Act (HIPAA) and drug safety regulations.
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(iii) Telecommunications: Overseen by the Federal Communications Commission (FCC), ensuring compliance with broadcasting, internet service, and wireless communication standards. (iv) Defense and Aerospace: Subject to Department of Defense (DoD) and International Traffic in Arms Regulations (ITAR), requiring special approvals for handling military-grade technology and defense-related exports. 4.2.9 Export Controls and Economic Sanctions U.S. businesses engaged in international trade must comply with export control laws and economic sanctions that restrict transactions with certain foreign entities, individuals, and countries. These regulations help protect national security and foreign policy interests. (i) Export Administration Regulations (EAR): Governed by the Bureau of Industry and Security (BIS), EAR controls the export of commercial and dual-use technologies that may have military applications. (ii) International Traffic in Arms Regulations (ITAR): Administered by the U.S. Department of State, ITAR regulates the export of defense articles, services, and technical data. (iii) Office of Foreign Assets Control (OFAC) Sanctions: Enforced by the U.S. Treasury, OFAC maintains a list of sanctioned countries, entities, and individuals with whom U.S. businesses cannot engage in financial or trade transactions. Companies must verify potential business partners and transactions against restricted party lists, which can be accessed through government websites such as the BIS Consolidated Screening List and the OFAC Sanctions List. Failure to comply with export and sanctions regulations can result in severe penalties, including fines and criminal liability. 4.3 Execution Formalities and Legal Documentation Executing legal documents in the U.S. involves specific formalities depending on the type of agreement, jurisdiction, and intended use. While many documents can be signed without additional formalities, certain transactions require notarization, apostille certification, or adherence to electronic signature regulations. Understanding these requirements helps businesses ensure the enforceability and validity of their legal documents. 4.3.1 Document Signing and Electronic Signatures In most cases, documents can be signed in any ink color, though black or blue ink is generally preferred for clarity in scanned copies. The U.S. widely accepts electronic signatures (e-signatures) under the Electronic Signatures in Global and National Commerce Act (ESIGN Act) and the Uniform Electronic Transactions Act (UETA). These laws grant electronic signatures the same legal effect as handwritten
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signatures, provided they meet security and authentication requirements. Facsimile (faxed) signatures are also accepted in many contractual agreements unless a physical signature is explicitly required.
4.3.2 Notarization Requirements Notarization is the process of having a notary public verify the identity of a signer and witness the signing of a document. The notary adds a seal and signature to confirm the document’s authenticity. Notarization is rarely required for most business transactions but is necessary for certain legal documents, including real estate deeds, affidavits, powers of attorney, and some government filings. Unlike civil law jurisdictions where notaries may draft documents, U.S. notaries primarily serve a verification role and do not provide legal advice. 4.3.3 Apostille Certification and International Recognition When legal documents need to be recognized in foreign jurisdictions, they may require apostille certification under the Hague Convention of 1961. An apostille is an official certificate issued by a designated authority (such as the Secretary of State) that authenticates the validity of a document for use in another member country. Documents commonly requiring an apostille include corporate formation certificates, powers of attorney, and notarized agreements intended for international transactions.
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FIVE ectio
INVESTING IN AN EXISTING U.S. BUSINESS
5. INVESTING IN AN EXISTING U.S. BUSINESS Investing in an established U.S. business can be an attractive option for foreign investors seeking to enter the American market. It provides immediate access to an existing customer base, operational infrastructure, and brand recognition. However, investors must carefully navigate regulatory requirements, liabilities, and financial considerations before proceeding. Below are key aspects to consider when investing in a U.S. business. 5.1 Advantages and Disadvantages of Investing in a U.S. Business Investing in an existing business can be a faster and less risky approach compared to starting a company from scratch. Benefits include:
5.1.1 Established Market Presence
Avoids the challenges of brand-building and gaining market recognition.
5.1.2 Proven Business Model Reduces uncertainty, as the business has a track record of revenue and operational performance.
5.1.3 Easier Access to Financing
Banks and investors are more willing to finance businesses with an established financial history.
However, there are potential downsides:
5.1.4 Higher Upfront Costs
Purchasing an existing business often requires significant capital, especially for profitable enterprises.
5.1.5 Inherited Liabilities
Buyers may assume legal, tax, or contractual obligations tied to the previous ownership.
5.1.6 Regulatory and Compliance Risks Foreign investors must comply with Committee on Foreign Investment in the United States (CFIUS) regulations if the business operates in a sensitive industry. 5.2 Equity vs. Asset Purchases Foreign investors can acquire a U.S. business through either an equity purchase or an asset purchase, each with distinct advantages and challenges. The allocation of liabilities and obligations largely depends on the terms negotiated in the Acquisition Agreement, making legal due diligence and strong negotiation essential to minimizing risks.
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5.2.1 Equity Purchase Involves acquiring the equity of the business, through a merger, direct purchase of shares, or similar transaction, effectively taking over ownership. Depending on the contractual terms, the investor may or may not inherit liabilities along with the business. (i) Advantages: Provides a streamlined transition, maintains existing contracts and business relationships, and often simplifies the transfer of necessary licenses and regulatory approvals. (ii) Disadvantages: Unless explicitly excluded in the M&A contract, the buyer may assume pre-existing liabilities, lawsuits, and tax obligations, making thorough due diligence essential. 5.2.2 Asset Purchase Involves acquiring specific business assets such as equipment, intellectual property, or customer lists, without taking over the company entity itself. However, depending on state laws and contract terms, certain liabilities (such as environmental obligations or product liability) may still transfer to the buyer. (i) Advantages: Provides the opportunity to select specific assets while minimizing exposure to past debts and obligations, subject to contract terms. (ii) Disadvantages: May require new business licenses, supplier agreements, and renegotiation of contracts, potentially leading to operational disruptions. Additionally, some liabilities may still transfer depending on the structure of the deal and governing laws. Since liability allocation depends heavily on contract negotiation, buyers should work closely with legal and financial advisors to structure the transaction in a way that aligns with their risk tolerance and business objectives. 5.3 Franchise and Licensing Agreements Foreign investors who wish to enter the U.S. market without full ownership of a business can consider franchising or licensing. These options provide a structured approach to leveraging established brands while potentially reducing regulatory burdens. However, restrictions and requirements may vary depending on the industry, the franchisor, and applicable U.S. regulations. 5.3.1 Franchising A franchise agreement allows an investor to operate a business under an established brand’s name, utilizing its business model, trademarks, and operational framework. In return, the franchisee pays initial franchise fees and ongoing royalties to the franchisor.
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Advantages
(i)
a) Lower entry barriers compared to building a brand from scratch.
b) Access to franchisor support, including training, marketing, and operational guidance. c) Proven business model with brand recognition, reducing market entry risks. (ii) Disadvantages a) Limited operational control, as franchisees must adhere to franchisor policies and procedures. b) O ngoing fees, including royalties and advertising fund contributions, which can reduce profit margins. c) Contractual obligations may restrict decision-making regarding pricing, suppliers, and business operations. (iii) Restrictions for Foreign Investors: While franchising is generally open to foreign investors, some franchisors may impose residency or financial requirements. Additionally, securing a visa (such as an E-2 Investor Visa) may be necessary for those planning to manage the franchise directly. 5.3.2 Licensing Agreements A licensing agreement grants permission to use a company’s intellectual property (IP), such as brand names, proprietary technology, or patents, in exchange for a licensing fee. Unlike franchising, licensing does not involve a standardized business model, giving the licensee more flexibility.
Advantages
(i)
a) Greater flexibility in adapting the brand or product to local market needs.
b) Fewer regulatory requirements and operational restrictions compared to franchising. c) No requirement to follow a rigid operational structure set by the licensor. (ii) Disadvantages a) Typically does not include business training, marketing, or operational support from the licensor. b) Limited exclusivity, as the licensor may grant rights to multiple licensees within the same market.
c) Dependency on the licensor’s brand reputation and continued success.
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(iii) Restrictions for Foreign Investors: Licensing agreements tend to be more negotiable and flexible, but some licensors may require local partnerships or operational oversight to ensure brand consistency and compliance.
5.4 Regulatory Requirements and Qualified Investors Foreign investors must comply with U.S. legal and financial requirements when acquiring a business. Some industries impose restrictions on foreign ownership, particularly in sectors like telecommunications, defense, and energy, due to national security concerns. Additionally, certain investment opportunities—such as venture capital and private equity deals—require investors to meet specific financial criteria. 5.4.1 Accredited Investor Status Under Securities and Exchange Commission (SEC) regulations, investors must qualify as accredited investors to participate in private securities offerings. To meet this status, an investor must have:
(i) A net worth of at least $1 million (excluding their primary residence); or
(ii) An annual income of $200,000 ($300,000 for joint filers) for the past two years, with the expectation of maintaining this level.
5.4.2 State-Specific Regulations
Some states impose additional financial or residency requirements for foreign investors: (i) California: Foreign investors seeking to purchase certain businesses, such as those in professional services (law firms, medical practices), may be required to have a U.S. resident partner or meet additional licensing requirements. (ii) Florida: Imposes restrictions on foreign ownership of agricultural land, requiring disclosures for investments exceeding a certain threshold. (iii) Texas: Limits foreign ownership in critical infrastructure industries, such as energy and telecommunications, requiring state-level approval for certain transactions. 5.4.3 CFIUS Review and National Security Considerations The Committee on Foreign Investment in the United States (CFIUS) is a U.S. government agency that reviews foreign investments for national security risks. CFIUS examines transactions where a foreign entity acquires substantial control over a U.S. business involved in: (i) Critical Technology: Businesses developing sensitive technologies, including AI, semiconductors, and cybersecurity.
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(ii) Critical Infrastructure: Companies operating in sectors such as energy, transportation, or telecommunications. (iii) Personal Data Collection: Businesses that handle large-scale personal data, such as financial services, healthcare, and online platforms. CFIUS has the authority to block or impose conditions on transactions deemed a risk to national security. In some cases, filings with CFIUS are mandatory, especially when foreign investors acquire controlling stakes in defense-related or high-tech businesses. Investors should assess whether their transaction falls under CFIUS jurisdiction and, if necessary, file for a voluntary or mandatory review to avoid legal complications.
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SIX ectio
INTELLECTUAL PROPERTY CONSIDERATIONS
6. INTELLECTUAL PROPERTY CONSIDERATIONS Protecting intellectual property (IP) is a crucial aspect of doing business in the U.S., especially for foreign companies expanding into the market. The U.S. legal system provides robust protections for patents, trademarks, copyrights, and trade secrets, but businesses must take proactive steps to secure their rights. Failure to properly register IP in the U.S. can lead to legal vulnerabilities, including counterfeiting, trademark squatting, and infringement disputes.
Several government agencies oversee different aspects of IP protection in the U.S.:
(i) The United States Patent and Trademark Office (USPTO) handles the registration of patents and trademarks. (ii) The U.S. Copyright Office administers copyright registrations, ensuring protection for creative works. (iii) T he International Trade Commission (ITC) enforces IP rights in cases involving the importation of counterfeit goods, regardless of whether the issue concerns patents, trademarks, or copyrights. U.S. courts also play a role in the enforcement of IP rights. While business owners can file IP applications on their own, it is generally not advisable due to the complexity of the process. Each type of IP protection involves strict legal requirements, deadlines, and potential challenges from third parties. Errors in the application process can lead to rejections, delays, or weak protections, making enforcement difficult in case of infringement. An experienced IP attorney can help ensure:
(iv) Proper classification and filing strategies to maximize protection.
(v) Compliance with U.S. legal standards and international treaties.
(vi) Defense against potential opposition or objections from other rights holders.
Proper IP protection is essential for maintaining competitive advantages, preventing legal disputes, and securing brand reputation. Businesses should consult an IP attorney to ensure compliance with U.S. registration requirements and enforcement mechanisms. 6.1 International IP Protection and U.S. Market Entry Foreign companies should not assume that international IP protections automatically apply in the U.S. Businesses entering the U.S. market should conduct IP due diligence to identify risks and secure necessary registrations before launching products or services. For example, the Madrid Protocol, an international treaty administered by the World Intellectual Property Organization (WIPO), allows businesses to file a single trademark application that can be extended to multiple member countries, including the U.S. This simplifies the application process for businesses operating across multiple jurisdictions. However, while the Madrid Protocol provides a streamlined filing mechanism, it does not guarantee trademark protection under U.S. law. The USPTO still conducts an independent review, and additional U.S. filing is often recommended to ensure compliance with local trademark laws and enforcement mechanisms.
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