FAQ Regarding the Legal Considerations for Doing Business in the US

Introduction

The US legal system, which is a common law system similar to those of the UK, Canada, and other Commonwealth countries, is different from the civil law systems in most of Europe. In civil law systems, the law is contained in the statute books. In contrast, US law develops in a number of complex and overlapping ways. US law incorporates the following sources of law: the laws passed by the legislatures of the different states and the US Congress; regulations developed by government agencies with formal input from the public; and the interpretations of those statutes and regulations by judges and courts that result from the filing of lawsuits. Under common law, the courts interpret statutes and regulations using the specific facts of each case, and those rulings may establish significant aspects of the law in question, affect subsequent rulings by courts on the subject, and contribute to changes in future legislation.

There is more litigation in the US than in most other countries, for both legal and cultural reasons. Litigation can be expensive and time-consuming, but it can be managed and its risks can be reduced or managed by working with experienced legal counsel regularly, as part of the planning process and before threats arise. 

Do I need counsel to operate in the US?

There is nothing inherent in the US legal system or in opening a business in the US that requires that a business engage lawyers, either outside or in-house counsel. However, because the US legal system is idiosyncratic, even compared with other common-law systems, and is quite different from most European systems, it is prudent to consult counsel regarding your business so that he or she can help identify and address problems before they become enormous and expensive to solve. Most of the questions in this FAQ can be answered more specifically about your company with the help of an experienced US-licensed lawyer.

Do I need a US accountant? 

It is advisable to get a US-based and –experienced accountant to work with your home country or parent company accounting and financial staff to ensure that you do not over- or underpay taxes, and that you meet all relevant accounting standards.

How do I form my corporation?

Each US state has a department or agency, often the Secretary of State or Department of State, that regulates the formation of corporations. In most cases, forming a corporation requires an application to the relevant State agency, confirmation that the name chosen is not already in use, a filing fee, and verification of publication of legal notices. All steps must be completed properly in order for a corporation to come into existence.

Which corporate form should I use?

The answer depends on whether you will issue shares to outside investors, and whether you will be profitable during the first year or two of US operations. The two most common forms are the C-Corporation (which gets its name from the section of the US Internal Revenue Code that deals with share-issuing corporations) and the Limited Liability Company, or LLC. The answer to this question also depends on the state in which you incorporate.

Where should I incorporate?

The answer depends on where you will operate, whether you will issue shares to outside investors, and your overall corporate organization.

Choosing a state based on its popularity as a location for incorporation is often not the best way to decide where to incorporate.  Furthermore, if you plan to do business in a state other than where you have incorporated, you may need to file for the Right to Do Business in those other states. Those filings include filing fees, sometimes nearly the same amount as incorporating in that state.

How is my business regulated?

Nearly every business in the US faces some regulation, by individual states, the federal government, or both. Your company’s activities determine whether and how it is regulated. For example, in general, software is not regulated, but some software that performs crucial functions in regulated sectors may be regulated depending on the context of its use. Other factors affecting the impact of regulation on a business include which industries or sectors rely on it. Examples of highly regulated businesses include financial services, food (both imported and processed or manufactured in the US), agriculture, medical and pharmaceutical services and products, defense, heavy manufacturing, automobiles, professional services, financial services, energy, and some computer-related services and products.

Finding out about whether and to what degree your business is regulated is an important first step in understanding the most cost-effective path to starting a business in the US. It generally requires the assistance of an experienced lawyer.

How do I get outside investment?

Outside investment is obtained via either the public markets, such as the New York Stock Exchange, NASDAQ, or other public exchanges, or the private securities markets, involving venture capital or private equity funds. The US startup funding markets were recently opened up to smaller investors via the JOBS Act, which was passed by Congress and signed into law by President Obama in order to make more investor funds available to startups.

Getting outside investment through the traditional venture capital firms or private offerings in compliance with the US securities laws is expensive, highly regulated and requires sophisticated and specialized legal counsel. Reputable venture capital firms require that the investor documents be drafted properly and that all of the rules of the relevant states and the US Securities and Exchange Commission be followed completely. Improperly drafted offering documents make the shares more expensive or difficult to sell to other investors, thereby reducing the value of any investment made.

Getting investors via the JOBS Act is simpler, but there are rules about how those funds may be raised, and there are limits on how much may be raised by any one company.

What kinds of people and entities may invest in my company?

Funds raised in the traditional private markets are subject to certain tests regarding investor qualifications. Funds raised via the JOBS Act are subject to fewer tests. The characteristics of investors, whether individuals or corporate entities depend on the means used to raise the funds.

How do I export my products to the US?

The first question to ask is whether your product is a physical product or an intangible one, such as software or services. The next question is to determine whether it is a regulated product or service.

If it is tangible, you will most likely need some assistance with determining whether and how it is regulated, and the requirements for complying with all of the relevant import rules. Tangible items will have to meet US Customs requirements, and those rules can change with little notice to you in your home country, based on US law changes, changes in the markets, and other factors, like food or other agricultural shortages. If it is intangible, you will also likely need assistance to determine whether there are rules affecting its use in the US. Regulated products may be imported into the US, provided that their manufacture and provision within the US meet the applicable manufacturing and related rules. It is advisable to work with experienced professionals in order to reduce delays in getting approvals to import legally, and to identify the correct US technical and business partners.

How do I get a visa for myself, and for my employees?

The type(s) of visa(s) you or your employees need is based on what you and your company will be doing in the US, how often and for how long you will be in the US, whether you will have US-based employees or representatives, and whether they are legally authorized to work in the US. Unlike some other aspects of doing business in the US, filing the wrong form or applying for the wrong type of visa is very difficult to undo or fix if done incorrectly. Officials of the US Department of Homeland Security and Department of State (which controls the US embassies and consulates around the world) essentially require that applications be made correctly the first time. It is absolutely important to do this properly with the advice and counsel of an experienced US immigration attorney.

Do I need to lease office space in the US?

Certain types of visas require a US sponsor, i.e. a US corporation or limited liability company, and require the demonstration of intent to operate and to hire US employees. This is accomplished in part by showing that a physical workspace has been secured in the US company’s name, via a signed office lease. Exporting to the US often does not require any physical presence, because the receipt and distribution of the goods may be managed by a local distributor, importer or other business partner in the US.

What agreements do I need to operate?

That also depends on what kind of business you have. As a pure technical matter, some businesses do not necessarily require a contract, based on state law. However, it is sensible (and can avoid needless litigation) to have agreements specifically written for the US market.

At a minimum, it is useful to have a sales or services agreement drafted for the US market, preferably under the law of the state where the business or the bulk of its operations is located. It is also a good idea to have some agreements with your employees regarding their use of your confidential information, protecting any trade secrets you have, and establishing fair employment guidelines and workplace rules. These agreements do not create an employment contract with your employees, but can help you manage your employees’ expectations and understanding of how the workplace should function.

How do I determine if I have Intellectual Property that needs protection?

Intellectual Property can be divided into two major categories. There is IP that is protected under by statutes, largely (and most importantly) federal law, and include inventions that are patentable, words and images that are copyrightable, and logos, names and phrases that may be trademarked. There is also intellectual property that is owned by the company, but does not meet the requirements for protection under the patent, trademark or copyright laws. The laws in the US differ substantially from those outside the US, and some things that are protectable in the US are not protectable in the EU or the rest of the world. It is best to consult IP counsel before disclosing any of the company’s secrets, processes, ideas or intellectual property to make sure that it can be, and is, properly protected.

How do US Data Protection laws differ from those in the EU?

The data privacy and protection laws in the US are quite different, and generally less protective of personal information, than those in the EU. There are two significant differences. First, in the EU, protecting personal data is considered a human right, whereas in the US personal data is a commodity, and is sold, traded, shared and analyzed, often without the data subject’s knowledge or explicit permission. Second, data protection, which is referred to as “privacy law” in the US, is based on the economic sector generating or using the data.  Thus, there are specific, unique privacy laws for the financial services and health care sectors, as well as privacy rules in other regulated sectors.  While certain data do not require protecting in the same way as in the EU, other data are entitled to a high level of protection, and violating those laws can lead to unlimited liability for corporations operating in the US. It is best to consider: where the information resides; where it will be used; the best mechanism for any cross border transfer of information collected in one territory and used in another; and how it may be appropriately disclosed intentionally (and any possible unforeseen uses) prior to collecting it or having it reside or be processed, even temporarily, in servers around the world.

Do my US employees need employment agreements? How can I terminate employees who are not working out?

Employment law is addressed by federal, state and local laws in the US. Federal law sets the floor, and some states and local governments add more protections for workers over what is required by federal law.

The US is unusual among industrialized countries in that there is generally neither a legal requirement to offer, nor a custom of offering, employment agreements to prospective employees. Some companies offer their most senior executives employment agreements, but that is not the standard in most cases. In most parts of the US, employers may terminate employment for any reason or no reason, provided that the reason is not an illegal, discriminatory reason. Those illegal reasons vary from state to state, and even by city, but generally relate to immutable characteristics in an employee, such as race, gender, age, ethnic background, national origin, disability or veteran’s status. Some places also protect employees based on their pregnancy status, sexual orientation and gender identity or expression.

Being able to terminate employees without concern for a contract has the advantage of allowing employers to manage their workforces more nimbly. On the other hand, not having a contract means that employees are not required to give any notice when they decide to leave a job, and a company’s chief assets can walk out the door easily, leaving the company with little in the way of backup.

Because many places in the US have antidiscrimination laws, companies frequently offer a severance or separation agreement to terminated employees in order to avoid potential litigation. Thus, employees sign an agreement under which the former employer agrees to pay them some amount of money (usually based on factors such as salary, seniority and tenure with the company) in exchange for the employee’s agreement not to sue under the relevant anti-discrimination laws.

What restrictions are there on hiring and firing?

In addition to the considerations above, it is helpful to document performance-related problems with employees, and to demonstrate that the employee’s performance is not improving based on reasonable feedback or guidance from management. Terminating an employee without a documented performance or financial reason, and without a severance agreement, can result in expensive lawsuits that can distract senior management from running and managing the business.

How must I pay my employees?

Employees who are paid based on the hours they work must be paid according to state wage and hour laws. The pay for salaried employees may be governed by state law regarding frequency of payment, minimum wage rates, and other rules that affect pay levels and rules. These rules are set by both state and federal law.

What benefits will my US employees expect from their employer?

That depends on the size and location of your company, its profitability, the maturity level of the industry and the experience of your employees. Most employers provide health insurance coverage, with the premium cost shared by the employer and employee; some types of disability insurance; transit subsidies; paid leave including vacation, personal and sick days, and some sort of retirement savings plan. Larger employers may offer work-related tuition reimbursement for training or advanced courses or degrees, and professional licensing and continuing education fees, among others. The Affordable Care Act does not require all employers to offer health insurance plans, but whether an employer must do so depends on the size of its workforce. Not offering it when required to do so can result in fines to the employer.

How do I get sufficient insurance for the geographic area where my business is located?

Getting the appropriate business insurance policies can be the difference between surviving unforeseen setbacks and having to shut down US operations. A good place to start is with your accountant, lawyer or finance professional to identify a knowledgeable, experienced business insurance professional. Certain types of insurance policies (flood and other weather-related policies, for example) are best obtained through government agencies. Other types of insurance are required by the government (such as unemployment insurance), or are highly recommended to limit the company’s liability.

Are there government or not-for-profit organizations that can help companies in my industry?

Many states and municipalities offer programs and assistance to small, new and growing businesses to help get established, develop a community to offer support and guidance and to exchange useful information. Most consulates and bilateral Chambers of Commerce, which are private commercial organizations in the US, also offer support and advice on getting started and succeeding in the US market. In general, the amount of government assistance for commercial ventures is less than in the EU; however, there is a lot of assistance that is not well-publicized. 

DISCLAIMER: Material in this document does not constitute legal advice under the professional rules applicable to lawyers in the jurisdiction where I practice. I do not accept representations in any jurisdiction where I am not authorized to do so. No attorney-client privilege or confidentiality will attach to any communications with me without a signed engagement agreement. Prior results do not guarantee a similar outcome.