Legal aspects of doing business in the USA - debiz.nl · PDF fileLegal aspects of doing...

© Van Velzen C.S. 2014/no rights, whether implied or not are to be derived from this information.

Legal aspects of doing business in the United States June 19, 2014 Brabants-Zeeuwse sociëteit voor Internationaal Zakendoen Subject: Legal aspects of doing business in the United States

Some pointers

The American market has a lot of rules to live up to before entering.

Think global, act local. The American market as well as its population is diverse. North and East coast residents are completely different. Compare the United States with Europe, when thinking about its (diverse) population.

Intensive networking and maintenance is a must. Frequent physical presence is recommended.

Payment methods. Much is paid by check, smaller payments are made in cash or by credit card. The use of a US dollar account is recommended.

Volatile currency rates. Within the European Union, we have an internally stable currency rate. Exporting to, importing from or investing in the United States means a currency risk. Long-term contracts may be lucrative, however may also be risky for that reason. When a product or service becomes too expensive for currency rate reasons, the product or service may not attractive to buyers anymore.

Other legal system, liability issues, legal procedures. Procedures may be very time consuming and costly. Think about credit risks, collection risks and costs. Include unforeseen expenses.

Preparation for entry The United States are still to be regarded as a challenging market for US based companies as well as internationally operating companies. Every year, many, many entrepreneurs set up shop at American soil, one of the largest consumer markets in the world. As a result of the large market, one needs time, patience, money, luck and good business sense in order to succeed.

The United States comprise over 9,800,000 sq km, The main land (including Hawaii) is divided into 50 states and the District of Columbia. It is the world’s third-largest country by size, and having a population of over 318,800,000 it is the world’s fourth-largest country by population. Approximately two-third of the population is between 15-64 years. The total estimated purchasing power was $16.72 trillion in 2013. Source: CIA, The World Factbook 2014.

Having a specialist perform a market survey is no luxury in most instances; drafting a long-term planning and budget is recommended. The United States have a legal system which deviates from what we are used to in Europe. Ever changing case law and jurisprudence play a very important role. An entrepreneur will face multiple (governmental) layers of rules and regulations.

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Exporting to or setting up a sales office or distribution facility in the USA? Many companies ever started their US (related) activities by visiting an expo or seminar in the United States. After having made a number of contacts, one started writing the first small export orders. After a while, an agent or distributor was appointed, after which the next step, setting up a subsidiary sales or distribution company was taken. That process took a lot of time and financials and a number of (legal) hurdles were to be taken. 1. What does one have to take into account, when entering the US market. When exporting to the United States, one must count with a number of national measures and rules, like import controls, security of products and labeling regulations. Import Controls The United States have a variety of import control laws related to recordkeeping, product value, classification, country of origin verification, etceteras. Although most goods can freely enter the United States, imports of certain products may be prohibited or restricted, like obscene or immoral products and merchandise produced by forced labor. Some imports need to be licensed, like alcoholic beverages, steel, animals and animal products and vegetables and fruits. Imports that may be limited by annual (absolute or tariff) quotas include chocolate, textiles, cotton and cotton waste, and cheese/dairy products.

Exporting to/distributing in

the USA

•product liability•safety

•proper labeling•insurance

•distributor/agent separate party•U.S. based legal entity in between

Pay attention to:

V A N V E L Z E N C .S .

______________________________________________________

Labeling regulations The United States impose certain barriers that may delay or even prevent import of certain merchandise. Such barriers may be found in special labeling requirements (i.e. wool products, alcoholic beverages) and compliance with Food and Drug Administration and US Department of Agriculture regulations (i.e. plants, insecticides, live animals and food are subject to special inspection). In general, all goods imported into the United States must be

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marked individually with the name of the country of origin in English. Agricultural products are generally permitted fast-track import. Recent rules During the past decade, the United States implemented new legislation called the Public Health Security and Bioterrorism Preparedness and Response Act on imports of i.e. food, dairy and vegetables. All companies producing, handling, packing or storing food and related products for consumption in the United States are required to register with the US government; before a product is imported into the United States, it needs to be ‘prior noticed’ to the US government. One may register through FDA’s website. It is recommended to inquire with a company or product insurer whether exporting certain goods to and bringing those on the American market are covered by the insurance policy concerned. Furthermore, a set of export control laws is applicable to exports of certain goods, to certain countries including so-called embargo countries. From a commercial perspective, the Export Administration Act of 1979, as amended, is one of the most relevant laws that may influence a US company’s – including a US subsidiary’s - export policy; the United States Department of Commerce, together with other agencies, regulates the export and or re-export of US-origin dual-use goods, software, and technology (Export Administration Regulations). 2. Sales & distribution channels; agent or distributor An agent is your company’s promotional instrument; an agent may represent several product lines and brands (also known as multi-line sales rep) and is generally not exclusively bound to a company brand. An agent concludes sales orders for your company, your company being responsible for delivery and collection of payment. An agent receives commission. A distributor purchases from a supplier and retains stock. In general, a supplier does not deliver to product end-users, only to and through the distributor. A distributor handles the marketing and sales of products and has the risk of non-payment. One has to take several factors into account when considering appointing an agent or distributor. What are the company’s short and long-term plans and objectives for the US market. Will initially only one part of the United States be covered and will the company start its own sales activities later on? When granting exclusivity to an agent or distributor, it is recommended to limit the scope of exclusivity or to retain that possibility. The United States are the fourth-largest country in the world having a population of over 318 million people in an area that comprises more than 9.8 million square kilometers. One or maybe a small number of distributors will assumably not be able to fully explore and service that whole area and gain the most of it. It is recommended to conclude detailed arrangements or agreements, specifically stating each party’s rights, duties and position. Alternatives for appointing an agent or distributor or for setting up an affiliated company, is the execution of a license agreement, whereby manufacturing, marketing and sales activities are for the account of the US licensee. Another possibility is the execution of a joint venture agreement between the European and American company.

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3. Setting up a subsidiary or affiliate company? A number of (business) reasons may lead to the decision of setting up a subsidiary company, i.e. because it is part of the company’s strategy, or because it enables facilitated transfers to the United States of the parent company’s employees, in regard to visa and work permit aspects, or because the market dictates the presence of a US based company. Many businesspeople in the United States will opt for an American supplier, when purchasing products. Besides, after-sales, when taken care of, will be assumed to be better and more service-oriented when performed by a US based supplier instead of a foreign based one. The latter may pose psychological barriers for a US purchaser. Choice of structure When setting up a company in the United States, it is advised to set up making use of a business entity with limited liability for its shareholders, while protecting its management. Frequently used entities are corporations and limited liability companies. The United States don’t have any mandatory requirements in regard to registering with a local or regional chamber of commerce. However, companies need to comply with a pile of regulations at federal, state, county, city and sometimes even more different levels and organizations, like a metropolitan area, a city transit department, or a special purpose district.

IRSDHS

Dept. of Commerce

Federal


______________________________________________________

State

County

City

Tax DivisionLicenses/permits

State Registration Business

Tax DivisionBusiness License

Zoning Compliance

Tax DivisionBusiness License

Zoning Compliance

Level Req.

Different levels of rules and regulations A corporation for instance, needs to be registered with a Division of Corporations at a Secretary of State’s office. It is mandatory for all corporations to have an Employer Identification Number, regardless of the fact whether people are employed. In general, a corporation, when doing business, also requires a state sales and/or use tax number. Setting up a company in the United States is a process that takes five minutes to incorporate or organize, but which can take several weeks, or even months, before all red tape is processed. The entrepreneur who wants to succeed on the US market, needs to comply with and live up to a variety of US rules and regulations.

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All US states have adopted their own corporate laws, which may vary per state. A corporate law that is used all over the United States is that of one of the smallest of the US states, Delaware. Corporate legislation of this state is generally regarded as leading in this specific area, which is also the reason why so many companies, operating throughout the United States have been incorporated in that state. A corporation incorporated under the laws of a certain state, e.g. Delaware, may do business in other US states, as long as it has obtained authority to transact business in the state it is doing business. The corporate law, under which it was incorporated remains in effect in regard to the company’s corporate structure and internal affairs. A general overview of characteristics

Entity type Main characteristics; advantages Main specifics; disadvantages

General Partnership

Simple, inexpensive to create and operate Owners (partners) report their share of profit or loss on their personal tax returns

Owners (partners) personally liable for business debts

C/business/regular/open Corporation

Limited personal liability to shareholders for business debts More possibilities for deduction of business expenses Corporate profit can be retained, to build capital

More paperwork than partnershipSeparate taxable entity

Limited Liability Company

Limited personal liability to members for business debts Corporate profit can be retained, to build capital Profit and loss can be allocated differently from ownership interests Choice of being taxed as partnership or corporation

Volatile (state) legislation and rules

Corporations One of the most widely used business entity forms is the corporation, which characteristics are: continuity of life, centralization of management, limited liability, and free transferability of interests. The main advantage of a corporation is the liability protection it provides to its shareholders (owners). As a separate legal entity, the corporation is liable for its own debts and can - in general - only be held liable to the extent of the corporation's assets. Except for circumstances in which the "veil" of corporate limited liability is "pierced", no personal assets of shareholders are placed at risk when doing business through a corporation. The corporate veil may be pierced when required corporate formalities, such as holding annual directors' and shareholders' meetings, etceteras, weren’t followed and when the corporation apparently has been acting as an instrument for shareholders and management to avoid personal liability, if and when the company is unable to meet its legal or financial obligations. If the veil is pierced by a court of law, the shareholders will be held liable for the corporation’s financial and other obligations.

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To form a corporation, articles of incorporation must be filed with the Secretary of State’s office in the state in which the corporation is being incorporated. After incorporation, the Secretary of State’s office prepares a state stamped certificate of incorporation, which normally is recorded in a county recorder's office where the corporation has its corporate seat, it’s so-called registered office. Every corporation has a registered agent as well as a registered office. Having both is a compulsory measure, in order for a Secretary of State to track and trace a corporation somewhere in the United States. The registered office is the statutory address, the address where the statutory seat is registered, and which is included in the articles of incorporation; normally, it is the same address at which the corporation’s registered agent resides or has its business. Control and management structure A corporation’s capital is divided into shares. In general, shares entitle to a certain portion of control. As a whole, shareholders own the corporation. Except for extraordinary circumstances, shareholders don't control day-to-day operations of the business. Their control is limited to e.g. electing directors of the corporation. A corporation normally has a two-tier management, the board of directors being responsible for overall management of the corporation, and the officers, being responsible for the management of the day-to-day business of the corporation. Directors oversee a corporation’s operations and are responsible for making major corporate decisions, like the appointment of officers of the corporation during their annual meeting, in which they assess the corporation’s (business) performance during the past year and in which they plan and decide regarding the company’s future. In general, day-to-day business is managed through four offices, which are the offices of a president, a vice-president, a secretary and a treasurer. Depending on state legislation, under which the company is incorporated, all offices may be held by one person. Since the corporation is an entity created by law and only to be operated by or through human beings, it is important to observe corporate formalities, as dictated by applicable corporate law the corporation has been incorporated under. Formalities include but are not limited to issuance of stock certificates to the shareholders, holding annual meetings, recording of minutes of the meetings of shareholders and corporation management, electing directors and officers and ratifying or approving management decisions. In order to avoid the corporation being regarded as an instrument of the shareholders, said corporate formalities need to be observed. Limited liability of the shareholders is only protected when the existence of a legal separate entity can be evidenced. Normally, directors and officers of a corporation, incorporated under or doing business in one (or more) of the US states, do not have to reside in the United States, neither is it mandatory to have US nationality. Of course, when working for a US company in the United States, one has to live up to US rules about employment by foreigners, i.e. immigration rules. Re. hereafter, subject ‘Visas’. Generally, shares held in an American corporation can be held by individuals and corporations or other legal entities abroad. In general, corporate state legislation does not impose heavy capital requirements; normally, only a small amount of paid-in capital is

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required. However, in order to avoid management or shareholder liability, one must avoid thin or undercapitalization, which may result in (personal) liability for shareholders, when the corporation is unable to meet its requirements. Limited Liability Company A limited liability company (abbreviated LLC) is a hybrid entity that has the tax transparent or tax flow-through characteristics of a partnership and the liability protection of a corporation (re. overview on page 5). The LLC is a relatively new type of business entity. The LLC may somewhat be compared with the German Gemeinschaft mit beschränkter Haftung. As from 1997, an LLC is treated as a partnership, unless the members (the owners) indicate that the company is to be treated as a corporation for tax purposes, which is often the case when foreign (e.g. Dutch or Belgian) corporate members are involved. The process of forming an LLC is somewhat similar to that of incorporation of a corporation.

Sole Proprietorship


______________________________________________________

Business forms without limited liability

Business forms with limited liability

Partnership

General General

Limited

Reg. LLP

Reg. LLLP

Corporation

Limited Liability Co.

Close

Non-Profit

Professional

Membership

‘S’ Corp.

Incorporating a separate legal entity such as a corporation or an LLC is definitely recommended when (considering) doing business in the United States. 4. Employing people The United States know two employment doctrines: at-will and at-term. People employed at-term have agreed on a certain definite period of employment, for instance a year. People employed at-will can leave the company anytime. It also means that employers may terminate employees at any time for any legal reason or for no reason at all. However, the employment-at-will doctrine is bound to some restrictions, based on federal/state laws and state common law. Employers are not at liberty to fire employees for exercising legal rights or for refusing to commit illegal acts. Examples are discrimination, union membership, jury duty and military service. Employees who refuse to perform illegal acts on behalf of employers may not be fired for insubordination.

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Minimum wages, federal and state rules The Fair Labor Standards Act of 1938 establishes the minimum wage, working standards, and child labor standards. The federal minimum wage currently amounts to $7.25 per hour. Many states also have adopted minimum wage laws. In cases where an employee is subject to both state and federal minimum wage laws, the employee is entitled to the higher of the two minimum wages involved. US Congress has enacted a number of laws in past years which provide specific protection and rights to employees, such as minimum wage and maximum hour rules, non-discrimination in employment practices, health and safety requirements and disability benefits. Most states have complementary or extending protection rules. Currently, there are no federal legal requirements for paid sick leave, however in several states, like New York and Washington D.C. this is regulated by state law. Manufacturing companies employing 11 or more employees must keep and post data in compliance with the Occupational Safety and Health Act of 1970 (OSHA). OSHA relates to injuries incurred on the job. OSHA covers private sector employers and employees in all 50 states, the District of Columbia and other U.S. jurisdictions either directly through Federal OSHA or through an OSHA approved state program. When employing 15 or more employees, the Civil Rights Act of 1964, the Age Discrimination in Employment Act of 1967 and the Americans with Disabilities Act of 1990 will definitely apply to the company. When employing twenty or more employees, additional federal discrimination laws will apply. Currently, the implementation of the Affordable Care Act occurs in stages, with many of the reforms and requirements taking effect in 2014. Some of the provisions may impact employers with 50 or more employees in offering health care plans to their employees. Employing people means paperwork and compliance with various laws and regulations. As an employer, do not forget to verify employment eligibility with all your employees and to report each new hire to the applicable state’s labor department. 5. Visas and work permits If and when a US based company makes use of foreign labor in the United States, that company has to comply with US immigration and labor regulations. Foreign labor may not be limited to local labor by non-US citizens, but may also include the employment of an expatriated specialist or manager. The foreigner needs to arrange for legal documentation, in order to provide the services intended. How and in what way can those be arranged? Green card, the myth A green card being mandatory for US employment is a myth. People often talk about the need for a green card, when considering employment in the United States. A green card is for foreigners (also known as ‘aliens’ in the US) who want to immigrate into the United States for an indefinite period of time. Immigration petition processing may take long time, sometimes years, before approval is obtained, if approved is obtained. Most work related visa applications are related to short- or medium-term employment or engagement in the United States. For instance, when a specialist from a certain (parent) company in the Netherlands or Belgium is expatriated together with his family to the United

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States to hold a position for 2-5 years, after which he will return with his family to his country of origin, the specialist and his employer can apply for a short- or medium-term work permit and visa, such as E-2, H-1B or L-1B. Visa Waiver For short-term trips to the United States, i.e. business visits, negotiations, attending lawsuits etceteras, not involving employment, a visa waiver or B-1/2 visa issuance will suffice. Before traveling to the US under the Visa Waiver Program, travel authorization must be applied for on-line, through the Electronic System for Travel Authorization (ESTA). US Customs and Border Patrol (CBP) decides about your request for entry when arriving at a US border post, CBP has discretionary authority to deny entry when deemed necessary. General rule is that, without a work visa, no services for a US company/employer may be performed, when remunerated by or through a US entity. A visa application procedure, other than a travel authorization application, may take several days to several weeks, depending on the visa category which is applied for. If and when a work permit is required, one must count with a longer term, which can vary from several weeks to several months. In 2001, USCIS – the United States federal adjudicator of work permit petitions - introduced the so-called premium processing procedure, which should guarantee faster processing; such processing requires payment of an additional $1,225 USCIS fee. An overview of work related visas


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General overview U.S. non-immigrant temporary work visas

ExecutiveManagerialSpecialized

E-1E-2

TraderInvestor

ExecutiveManagerialSpecialized

Specialtyoccupation

I

II

Temporaryworker

yes yes

L-1AL-1B

IntraCompany

Transferee

yes yes

H-1BH-1C

H-2AH-2B

No

III Various(1)

A-1/A-3G-1/G -5

INAT O-1/NATO-7

O-1/O -2

P-1/P-3Q-1

R-1

Trainee

IVVarious

(2)

H-3

F-1J-1M-1

HvV/US.temp.visas.eng/5Van Velzen C.S. ** http: //www.vviworld.net

Type ofbeneficiary

Qualification Type ofvisa

Related subject: a European driver license and driving in the United States Whether a European driver license is valid for driving a vehicle in the United States is depending on the term of stay and whether one meets the ‘resident’ criterion.

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Holding a valid European driver license won’t pose a problem for tourists or short-term visitors. If, however, a foreigner intends to reside in the United States for a longer period of time, he or she needs to apply for a US state driver license. Conditions may vary per state. It is recommended to obtain a valid International Driver License in the European country of origin before departure to the United States. Van Velzen C.S. assist companies setting up and expanding operations on the US market, and provide corporate, contract and transfer & expat related services. __ Van Velzen C.S. Internet: http://vviworld.net The Netherlands Tel: +31 76 578 1255 Fax: +31 76 578 1250 E-mail: [email protected] Belgium Tel: +32 3 314 0326 Fax: +32 3 314 0327 E-mail: [email protected] __ Hans van Velzen, June 2014

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