“Two nations divided by a common language.”
- 80% is the same – industry sector, business goals, negotiation skills, common contracting issues
- 20% is different – culture, laws, regulations, enforcement, government structure
- The 20% makes a difference!
The US Market
This blog post and the following ones describe issues to consider regarding your business’ interactions with the US. Doing business in the US can be a complex and daunting process. MBM Commercial offers sophisticated US law capability to help when expanding into US markets or transacting with US businesses. We work locally to support clients globally in corporate and commercial transactions.
The US is a pro-business environment with a large potential consumer base and business support services. This provides great opportunities and options for UK businesses and can facilitate start-ups established businesses and growing quickly from day one. On the other hand, the US is also a rigid, highly regulated and litigious environment. While the business and legal words are broadly similar to the UK, there are many important differences and potential pitfalls.
One of the factors which contributes to the highly regulated environment is that US law is made at several levels, principally at federal and state levels, but also at local city and county levels – municipalities may have their own sets of rules and regulations applicable to particular local areas and issues. Each of the 50 US states has its own law and, while uniform laws have been adopted by many states, each state’s law is distinct. While the business set-up process is similar for US residents and non-residents, there are additional complications to be aware of. Given the complex regulatory regime and potential pitfalls, it is important to prepare and plan ahead before entering the US market and to protect your business.
Is the US the right market for your business?
When you are looking at entering the US market or expanding your business’ reach in the US, there are many questions to consider; it’s a vast market. Initial factors to consider in determining whether setting up a US business include:
- Liability protection, tax and market profile.
- The business’ level of dealings in the US, current and projected.
- The business’ target market or customer base in the US.
- The business’ need for “boots on the ground” in the US.
- The business’ need for marketing, supply chain and other support services in the US.
- Plans for investment from the US.
Routes to enter the US Market
Entering the US market is often achieved on a gradual basis, starting with increased sales to the US, perhaps a distribution arrangement with a US party before setting up shop there. The table below summarises the common routes to entering the US market:
| No Physical Presence in US | Physical Presence in US |
|---|---|
| Import/Distribution – Contractual arrangements with a third party | Branch – an office of your UK business in the US |
| Sales Representative/Agent/ Consultant – usually commission-based | Joint Venture between your business and a US party |
| Licensing | Form a new entity – for liability protection, tax and market profile reasons |
| Franchising – a highly regulated area | Investment in U.S. entity |
How should our business enter the US market?
Once a business has decided to enter the US market, there are multiple decisions to be made, including:
Where should we locate the US business?
- Factors include location of customer base; ease of recruiting qualified staff; costs of staff, property and utilities; tax, incentives; connectivity, infrastructure, quality of life and cost of living.
Where should we form our US entity?
- Delaware is a common choice but there may be other appropriate options.
- Factors include future capital raising and geographical reach of business.
Do we recruit locally or transfer staff?
- Employment laws in the US differ quite significantly from the UK; good legal advice is crucial
- Employment is generally at-will with no or limited notice requirements
- Employees are classified as “exempt” or non-exempt classification, which has implications for overtime payments and compliance
- If it is intended that UK employees will work in the US, visas will be required
How do we protect our intellectual property?
- Consider registering a US trademark and copyrights; file for patents and make sure to protect your intellectual property.
- Beware of “oversharing” – enter into Non-Disclosure/Confidentiality Agreements and consider your approach to due diligence, including the information shared and timing of release of information.
What licenses do we need?
- Local business licenses are often required, some specific to the particular industry.
How do we protect the business?
- Consider limited liability protection such as creating a separate entity (see more on this below)
- Federal, state and local laws and industry-specific regulations leads to multi-level compliance requirements, so legal advice is key
- Obtain insurance for US operations
- Localize sales, distribution, license and consultancy agreements to comply with US law
- Take advice on accounting, tax and transfer pricing issues
More detail on the routes to the US market is below:
No Physical Presence in US
Import/Distribution
- Appointing one or more distributors or licensees for products in the US is often the “entry level” point for businesses exploring the US market. If you only plan to sell goods, whether through online channels or wholesaling to US companies, it may not be necessary to form a US company.
- Consider variables in distribution and licensing arrangements, including as to exclusivity, territory, pricing, length of term, manufacturing and packaging.
- Federal and state anti-trust laws may affect resale, pricing, exclusivity and selective distribution
Sales Representative/Agent/ Consultant
- Effectively an agent; not an employee
- Typically a commission-based arrangement
Licensing
- Identify which rights are being licensed
- Protect your intellectual property
- Joint development agreements
Franchising
- Highly regulated – disclosure documents and financial statements
- Form new entity as liability shield
- Protect your intellectual property
Physical Presence in US
Branch
- A US branch is not a separate entity and does not provide any liability protection for the UK entity
- If direct sales are made into the US, branch operations may be established in the US and a UK business may register as a foreign corporation in the states where business is conducted.
- BUT, establishing a branch may have tax consequences and liability protection and the UK entity may be exposed to the liabilities of the US branch
- In the absence of a treaty exemption, the income generated by the branch will be subject to US tax, including branch profits tax, and the non-US entity may be exposed to the liabilities of the US branch, including product and tax liabilities.
- A branch may not provide any tax advantages over forming a US entity, and triggers a US tax filing requirement by the foreign corporation, formation and use of US corporations is often preferred over operation via a branch.
- As a US branch is not regarded as a legal entity, the parent company is potentially liable for matters arising from US operations.
US Entity Types
Corporation
- This is treated as a separate legal person from its directors and shareholders; liability is limited to the corporation’s assets, subject to adequate capitalization and respecting corporate formalities; taxation is at corporate and individual levels. Corporations may be for profit or not-for-profit.
- A “C” Corporation often the best choice for UK companies; an “S” corporation may not have non-US resident shareholders.
Limited liability company (LLC)
- A “hybrid” of a corporation and a partnership
- Typically transparent for tax purposes.
- A single member LLC is disregarded for US tax purposes and essentially treated as a branch, so may not be an appropriate structure for UK businesses unless a “blocker” corporation is put in place.
Partnership
- Owned by its partners; partners are personally liable; transparent for tax purposes. A partnership may be general or limited.
Joint Venture
- May be in corporation, LLC or partnership
- Early due diligence of the other joint venture parties is key
- Establish which assets and IP rights will be contributed to the joint venture by each of the parties, and at what stage
Subsequent blogs will discuss logistics and practicalities of setting up in the US, forming a US entity; employing staff and operating and expanding the business.
