We assist clients in assessing and minimizing legal risk of their U.S. investment through establishing the appropriate organizational structure. Important organizational considerations when expanding into the U.S. market include:
– Which entity (foreign or U.S. subsidiary) will sell products/services in the U.S.?
– Which entity should be party to U.S. contracts?
– Which entity will apply for registration of IP and own the IP?
– Who will be the owners (shareholders/members) of any U.S. subsidiary?
– Should there be a written agreement (Shareholders’ Agreement/Operating Agreement) between the owners of a U.S. subsidiary?
– Which entity will sponsor visas for any immigration needs?
– Which entity will employ U.S. employees?
– If a U.S. entity is established, should it be a C-corporation or a limited liability company (LLC)?
How a company addresses these issues will profoundly impact the exposure to liability of a company doing business in the U.S. It is imperative to appropriately organize matters from the start or it may cost substantially more for legal counsel to fix it later.
Incorporation of Subsidiary
A wholly owned subsidiary gives the parent corporation direct and exclusive control over its involvement in the U.S. market, and creates a layer of insulation against contract related claims from US partners and customers. Be aware that a US subsidiary will never serve as a firewall, especially if the foreign company has designed, created, produced, and shipped the product to the US. However, contractual claims can be significantly limited through doing business in the US through a US company. The subsidiary can be a sales representative, distributor, licensor, or licensee of the parent company’s technology.
Incorporation requires the following simple steps:
- Obtain clearance of corporate name with the Secretary of State in the state where you want to incorporate (to decide on a suitable state, consult your U.S. attorney);
- Describe the purposes for which the corporation will be organized;
- Disclose the type of stock to be issued and the number of shares to be initially issued;
- State the consideration (purchase price) for the shares;
- State the initial number of members of the Board of Directors; and
- Appoint the Registered Agent of the company.
There is no longer any minimum initial capitalization required in most states, rather than a minimum required to organize a corporation in most foreign countries.
Normally, in order for a direct “Greenfield” operation to be successful in the U.S., qualified American marketing specialists should be hired. It often times takes too long for foreign management to understand the market and how to penetrate it.
If a subsidiary is incorporated, you must carefully structure the relationship between the European parent and the US subsidiary from the outset, on an arm’s length, commercially reasonable basis. Unreasonable pricing or other concessions can lead to problems with customs duties, anti-dumping laws and general taxation.
Use of U.S. Subsidiary as Bridge
Regardless of whichever of the above investment methods is chosen, or the many hybrids thereof, use of a U.S. subsidiary is many times advisable.
- A U.S. company is inexpensively organized and maintained. The cost of incorporating is approximately $2,000 plus filing fees.
- A U.S. corporation is an independent taxable entity providing an opportunity for the negotiation of appropriate distribution, transfer pricing, marketing and technical support agreements.
- By channeling product, technology, etc., through a U.S. subsidiary, the foreign company can build up a pool of equity in the U.S. for possible future expansion.
- Liability for acts in U.S. can be limited through use of subsidiary. Europeans courts generally do not make parent corporations responsible for the acts of subsidiaries. Consult your local counsel on this.
- A U.S. subsidiary is good as a hedge against future tax increases or exchange controls in the foreign country.
- The U.S. subsidiary establishes its own credit.
- The U.S. company can serve as a bridge for immigration purposes.
- The U.S. company can serve as a guard against heightened protectionist tendencies in the U.S.