Creating a U.S. Subsidiary to Sell or Manufacture in the US
By Aaron N. Wise, Attorney at Law © 2009
Here, we are dealing with setting up a wholly-owned U.S. company, not a U.S. entity with two or more shareholders which, broadly viewed, is a joint venture. There are many reasons to set up a wholly-owned U.S. company. You may want to have a presence in the market; to satisfy existing customers and prospects; to manufacture, process or assemble products in the States; to protect against liability claims; and to minimize certain tax or customs duty-related costs.
• Legal Form. What legal form should most foreign business people select for their American business? The answer for most foreign parties is a “corporation”. There is no such thing as a U.S. corporation per se. Each of the fifty states has its own laws governing the creation of legal entities, corporations included. So, in the case of corporations, there are Delaware, New York, Florida, California, Illinois, etc. corporations. When this booklet refers to “U.S. corporation”, it means one formed under the laws of a U.S. state. A U.S. corporation offers the feature of limited liability to its shareholders (limited to their respective capital contribution). The limited liability company (“LLC”), while offering the limited liability feature, is, for legal, tax and cost reasons, usually not the appropriate vehicle for foreign parties; and there typically is no other form of legal entity that is appropriate--except the “corporation”.
A few more words are in order about the limited liability company = “LLC” and why it may not be the vehicle foreign parties should use. Tax-wise, the LLC is a pass-through. While the LLC itself must file a US federal income tax return (and possibly one or more state or even city returns), its owner(s) must obtain a tax number, have prepared and file these same tax returns and pay the resulting taxes due. A foreign (non-US) legal entity or individual should normally not have to do that---it should stay as far away from the US tax authorities and their worldwide auditing capabilities as possible. The use of a U.S. corporation will accomplish that. Also, it is typically more expensive to form and organize properly an LLC than a corporation. The corporation has well recognized internal structures, whereas the LLC does not. Preparing the LLC operating agreement properly along with related documents and features can often involve considerably more costs than the formation of a U.S. corporation. Third, while both a U.S. LLC and a U.S. corporation offer limited liability to its owner(s), there are situations where the LLC may potentially offer less limited liability than the corporation.
• What’s Wrong With Just Setting Up a Branch Office of My Company? For the overwhelming majority of foreign companies, a “branch” in the USA of your home country company (or any other non-US company in your group) is not the way to go. A branch of a foreign company is just an extension of that company within the USA. It subjects the company to (1) being a more visible target for lawsuits and claims in the States; and (2) being liable for U.S. federal, state and possible local income taxes, and possibly other taxes. That applies for an “unregistered” as well as a “registered branch”. An unregistered branch means any U.S. place of business or the like of the foreign company which is not registered to do business in the U.S. state in which it is conducted its business. A “registered branch” is one that is formally registered to do business in that U.S. state. If, under the laws of a particular U.S. state, the foreign company’s business activities through its operations in that state is sufficient to require it to register there, it must do so or run the risk of penalties and other negative consequences. That does not mean just establishing a sales office in that state, rather, it can include as well having an employee there, having a stock of goods there, including on consignment, and other “links” with that state. Essentially, one could loosely say that any type of business activities within the USA involving some sort of presence of the foreign company, can be viewed as a possible “branch”.
The same is true if one or more individuals establish an unincorporated (in the USA) business operation in the States.
In many foreign countries, it is quite common, without inordinate risk, for a foreign company to establish a branch. Not in the USA. There are a few exceptions, but very few. For example, some banks in the USA operate as branches or representative offices.
But to repeat, for the great majority of companies, the best advice will be to form a U.S. legal entity offering limited liability to its owner(s). The entity of choice will typically be the “corporation”.
• Which U.S. State? Under which U.S. state’s laws shall I form my corporation? The answer will vary depending on the particular company’s needs. In most cases, though, the choice, in this writer’s view, will come down to: 1. a Delaware corporation; or 2. a corporation formed under the laws of the U.S. state in which the corporation will have its center of operations (e.g., main office).
• Registering in Another State or States. If I form my corporation in one U.S. state, then operate my business in one or more other U.S. states by accepting orders for goods and services within that or those other states, do I have to register my corporation to do business in that or those other states? The answer is generally, yes. Certain other activities that your corporation carries on or performs in U.S. states other than the one in which it is formed may require its registration to do business there. That registration process is not difficult, time consuming or expensive. Note, however, that the mere fact your corporation sells its goods from one American state to a customer in another American state does not normally require the corporation to register to do business in the customer’s state.
• Corporate Name. Is the name of my corporation formed in one state protected in all of the other U.S. states? The answer is no. But that usually does not present any serious problem. Even when it does present a problem, it can generally be satisfactorily resolved.
• Corporate Name and Trademark. A company name is not the same thing as a trademark. A registered U.S. federal trademark will provide protection throughout the entire USA for the particular goods or services for which it is registered. The name of your U.S. corporation will give you (weak) protection within the state in which the corporation is formed, and in those other states in which the corporation is registered to do business. But the protection offered by a corporate name is far from, different, and much weaker than, the protection accorded by a U.S. federal trademark. Thus, a foreign enterprise will normally want to obtain U.S. federal trademark protection for the name, brand, logo, or other designation used in connection with the products or services it will be marketing in the States.
• Can Your Use of a Corporate or Company Name Infringe a Third Party’s Trademark Rights? Yes. That is one important reason why, before definitely selecting a corporate or company name and forming the US entity, your U.S. lawyer should research for you whether the key word(s) in it are protected in the USA by third party trademark rights, particularly if the third party’s business is somewhat similar to what yours will be. If the US entity will promote, market and sell in other countries like Canada and Mexico, similar research would make sense. If the research turns up some serious potential problem, then you should select a corporate or company name not involving that risk. If legally possible, you should also give serious consideration to applying for trademark protection for the key word(s) in the selected U.S. entity’s name in the relevant countries, the USA, Canada, Mexico etc.
• Minimum Capital. Is there any “minimum amount” of capital I have to put into a U.S. corporation? In most states, there is none; and the minimum is very low in those states that specify one. That means that you are essentially free to decide on the amount of capital you want to contribute. In some situations, it may make tax sense to split the total invested dollar amount into an equity piece and a debt piece. Property or services can usually be contributed as capital (but, under some states’ laws, only past services rendered, not future services, can be contributed). However, if the foreign party should wish and qualifies to obtain an “E” type U.S. visa for one or more key nationals who will work for the U.S. corporation (particularly an E-2 Treaty Investor visa), the total amount of the corporation’s paid-in capital must be of a sufficiently high level for the type of business operation concerned.
• Nationality or Residence Requirements. Non-U.S. nationals can own all of the shares of a U.S. corporation. There is no requirement that a U.S. citizen or permanent resident own shares. Nor must a member of the corporation’s Board of Directors or corporate officers own any shares (like “directors’ qualifying shares”). Similarly, all of the members of the U.S. corporation’s Board of Directors and all of its officers can, if so desired, be non-U.S. nationals and U.S. non-residents.
• One Shareholder. There is no problem with a U.S. corporation being owned by just one shareholder.
• Par Value and No Par Value Shares. It is common to issue “no par value” shares, rather than shares having a par value.
• Board Members’ Powers and Related Points. Members of the Board of Directors (called “directors”) are not directors in the sense of the term that term is used in many other countries. In the U.S. meaning, directors are simply members of the Board. The Board acts and decides as a body; individual directors have no power to act or to bind the corporation individually (unless, exceptionally, by resolution or power of attorney, the corporation grants a particular director certain powers). Under the laws of many U.S. states, a one person Board is possible. Some states have a different rule when a corporation has two or more shareholders. Directors can be officers and officers can be directors.
• Required and Optional Officers. Many, if not most, U.S. state laws require a corporation to have a President, a Treasurer and a Secretary. Other officer posts are optional (examples: one or more Vice Presidents or an Assistant Treasurer). The officers’ respective powers (and limitations thereon) will typically be contained in the corporation’s bylaws and/or in a Board resolution.
• Restricting Powers of Corporate Officers. The powers of corporate officers can be restricted or expanded in the corporation’s bylaws, by contract or special Board (or shareholder) resolution. However, a third party without knowledge of restrictions on the officer’s powers may not be bound by them.
• Is a Corporate Officer or Director of a U.S. Corporation Its Employee? No, not merely from serving as such. If it is clearly agreed that the officer or director is an employee of the corporation and he/she is on the corporation’s payroll, then yes. But, for example, it is not at all unusual to have a President, Vice President, Treasurer, Secretary or other corporate officer who is not an employee of your corporation. Often, your U.S. lawyer will serve as the corporation’s Secretary, but he or she will normally not be its employee.
• Tax Returns If Corporation Inactive. Yes, the corporation must file tax returns even if it generates no income or is inactive.
• Lawyer in One State Forming Corporation Outside That State. An experienced corporate lawyer located in one U.S. state will have no difficulty in forming a corporation (or any other type of U.S. legal entity) in another U.S. state.
• Time. It takes only a short time to form a 1 shareholder U.S. corporation in any U.S. state from the time your lawyer has received all of the information required. But is does take time to do the preparatory paperwork properly.
• Corporate Bank Account(s). The setup of one or more bank accounts for the corporation is often done by your U.S. lawyer. That can often be a surprisingly lengthy, complicated procedure.
• Office Leases; Other Premises Leases; Warehouse Leases; Foreign Trade Zones
1. Office Leases. You can lease office space in many different ways: a lease of real office space in a building; leasing space from a business incubator or “baby-sitting” firm; leasing via an office-sharing arrangement; leasing a “virtual office”, etc. It is true that there are various types of pre-printed office leases, and most of those are pro-landlord. Moreover, landlords often either modify a pre-printed office lease to make it even more landlord friendly, or create their own. Moreover, if U.S. work visas (like, for example, an L-1 intercompany transferee or E-2 or E-1, or H category visa) are needed for key employees of your U.S. entity, the type of office space lease you conclude will be important. U.S. immigration will want to see a genuine lease of office space (typically not a virtual one or home office of an employee) sufficient to house the number of employees you anticipate having, and for a term sufficient to match the number of years requested in the visa application(s). Thus, you are well advised to have your U.S lawyer counsel you on the above, and review and negotiate the landlord’s lease draft. For more information on this subject, you might consult the author’s cost-free guide, “Purchase and Leasing of Real Property in the United States”.
2. Other Premises Leases. Certain businesses will require particular types of premises. These might include set up of a restaurant, school, academy, museum, hair salon, or other service business requiring a particular type of premises in terms of location, size, configuration etc. The corresponding leases will often be more complicated and difficult to negotiate to suit the investor’s needs. The comments under “Office Leases” apply as well.
3. Warehouse Leases. You may need a warehouse for your goods. Many warehouses offer a variety of services to choose from, ranging from mere warehousing, to that plus invoicing customers, shipping, etc. Most of the points under “Office Leases” will apply to these.
4. Foreign Trade Zones (“FTZ”). FTZs are secured areas legally outside of U.S. customs territory. Their purpose is to attract and promote international trade. They are operated as public utilities by states, political subdivisions or corporations chartered for such purposes. Any foreign or domestic merchandise not prohibited by law, whether or not subject to U.S. customs duty, can be placed in a FTZ. In general, merchandise in a FTZ can be stored, sold, exhibited, broken up, repacked, assembled, graded, cleaned, mixed with foreign or domestic merchandise, otherwise manipulated, or destroyed. No retail trade can be conducted there. Some of a FTZ's advantages are: (i) customs duties or, if applicable, federal excise tax, are paid only when merchandise is transferred from a FTZ to U.S. customs territory for consumption or use; (ii) goods can be exported out of the U.S.A. from a FTZ free of U.S. customs duty and tax; (iii) procedural requirements for using a FTZ are minimal; (iv) goods can remain indefinitely in a FTZ. There are other advantages as well.
• Manufacturing in the USA. Here are a few things that will have to be done:
1. Decide where in the USA to manufacture. Negotiate with the state and local authorities for incentives and benefits (e.g., tax breaks, reduced power costs).
2. Decide whether to build a new or existing building for the plant or to lease it; decide whether to buy or lease the land; and how these operations will be financed.
3. Decide what equipment will be needed for the plant, whether it should be purchased or leased, and how to finance the operations.
4. Hire employees, deal and negotiate with a union, if any; and train employees. That short list is very far from being complete. One comment regarding point 1 is appropriate. Legal and tax factors or incentives offered by particular U.S. states should not be your primary reasons for deciding where to locate your production facility. Other, more practical factors resolving themselves into one trite phrase should prevail: “Where does it make the most practical business sense to locate my production facility?”
• Government Investment Incentives. At the federal level, there are none. U.S. states offer various investment incentives, as to many local government units. For the most part, no significant investment incentives are available unless the investment will produce a fairly large number of jobs for American citizens or residents, or involve setting up in a particular area targeted for development. However, even if no significant incentives are available for your particular investment, the state and local economic development authorities will typically provide considerable useful information, contacts, facilities, and the like. A number of U.S. states have economic development offices outside of the USA, and contact with them can be beneficial, at least as a starting point.
• Insurance; Payroll Company. You will need certain types of insurance for the U.S. operations, and may wish to consider other types. Examples in the commercial insurance area are: general liability insurance; product liability insurance (which may or may not be part of the general liability insurance); business property insurance, covering your own goods and physical property; directors and officers liability; employer’s practices liability; intellectual property infringement; professional liability (errors and omissions); and workers compensation insurance. In the personal insurance area, medical, disability and life insurance are examples. You will probably want to (and have to) contract all or most of these from an insurance broker located in the States. See Chapter 4 regarding personal insurance. Your U.S. lawyer will often be able to suggest a reputable one with which he/she works, and assist you in deciding on what insurances you need, obtaining quotations, and in putting them in place. The same applies for engaging a payroll company to handle the U.S. entity payroll and possibly other functions, if you decide to go that route. These, particularly insurance policies, take time to put into place, thus, an early start is generally needed.
• Accountant. You will need one. The accountant can perform a variety of services, like advice in tax planning (often, together with your U.S. lawyer), doing the bookkeeping, preparing financial statements, and preparing tax returns. Your U.S. lawyer will frequently be able to suggest reputable accountants he knows and works with, or that he can locate, of the size and type to fit your requirements. It is beneficial that your U.S. lawyer and accountant already have or establish a good working relationship. Note: the majority owner(s) of the U.S. entity should select the accountant and other outside experts, not, for example, an employee of the U.S. entity that is not a majority owner. The majority owner(s) will want the accountant’s/outside experts’ loyalties run to them and not anyone else.