Last month you read about “How to Start a U.S. Business from Abroad.” Once formed, operating the entity in compliance with U.S. laws and regulations makes sure the business is profitable. If the business is in a heavily regulated industry, such as pharmaceuticals or medical devices, then developing strategies and solutions that avoid violations, citations, warning letters and litigation is critical. BioPortUSA and its team of subject matter experts can help spot the risks that are often market barriers to entry to the U.S. market.
Here is our Checklist for Operating a Compliant and Profitable U.S. Business
1. Who runs your U.S. business?
Under U.S. laws, a corporation’s shareholders elect a board of directors, which in turn appoints the officers, who then run the company on a day-to-day basis:
- Who are the shareholders? Whomever you want them to be. U.S. law allows the foreign entity/founder to be the sole (100%) shareholder of the U.S. entity. But selling shares to U.S. and non-U.S. investors is a good way to raise capital – just be sure to comply with federal and state securities laws.
- Who are the directors? Whomever the shareholders elect. A board commonly consists of 5-9 directors, with a majority representing the foreign founder (Global President, International Marketing Head, etc.). Other directors might include the U.S. entity president, the lead investor, or individuals with industry-relevant experience in the U.S. Note: Directors need not be employees or shareholders.
- Who are the officers? Whomever the board of directors appoint. The president often has years of experience with the founder, who is able to live in the U.S. under an L-1 visa. The VP of Sales and Marketing should have U.S. experience. Treasurer and Secretary roles are somewhat ‘ceremonial’ and can be used as rewards or recognition for founder employees. Officers will hire employees.
- Who are the employees? Officers should be employees of the U.S. entity, but U.S. law does not require them to be U.S. citizens or even to reside in the US. There are benefits to employing ‘locals,’ so keep that in mind when selecting a location for your operations.
2. Sales Force: Employees or Independent Contractors?
In the U.S., it is common for new companies to contract with distributors and sales agents. Unlike foreign countries, agent and distributor contracts in the U.S. are not protected by statute. If well-written, terminating a contract and hiring an employee sales force is easily done. Note: Additionally, there is also the very unique option of using a ‘professional employment organization (PEO).’ The individuals at your facility may look like your employees, but the PEO is their actual employer.
3. IP: Patents
Often times, a U.S. entity is formed to allow a foreign company to monetize its patent and intellectual property (IP). But, in hi-tech and highly regulated industries, there are tax, accounting and regulatory issues associated with patent ownership. Selling the IP outright to the U.S. entity rather than licensing it may be advantageous, while licensing allows exclusivity to be limited by territory or field of use.
4. IP: Trademarks, Trade Secrets and Copyrights
In the U.S., the right to use these types of IP can have significant value (remember when the mark “Bayer” in the U.S. was not German-owned?) And trade secrets are often the key to effective patent utilization. So tightly worded licenses are critical to protecting the foreign company’s interests.
5. Transfer Pricing
Many products pass through multiple countries during the manufacturing process. Companies interested in minimizing their worldwide tax obligations should carefully consider IP, tax and regulatory issues in each of those countries before establishing a transfer price for their U.S. entity.
6. Compliance: Employment, Manufacturing, Lobbying
Though it is extremely easy and cost-efficient to create a U.S. legal entity, it is extraordinarily expensive to operate that entity in a compliant manner. Each State and the Federal government have unique (and sometimes conflicting) laws and regulations regarding employment, the environment, manufacturing and competition. There are also many industry-specific rules regarding marketing and sales. And, although U.S. elected officials are obligated to meet with their constituents, discussions and expenditures can unexpectedly create lobbying violations.
While it is well-known around the world that the U.S. is a litigious society, what is not so well-known is the fact that most such risks can be insured against, and that the costs of those policies are easily included in annual budgets. Whether the insurance is for defective products, general liability, employee disputes, auto accidents or customer injuries, policies can be purchased that cover both the costs of litigation and of damages.
Many visas allow foreign individuals to work in the U.S. However, most require completion of complex forms, as well as thousands of dollars in legal expenses and filing fees, Then the U.S. government takes months and months to processing your application. But “L” visas are different. The U.S. entity can apply to have an employee of their foreign parent ‘transfer’ to them in U.S. As long as the employee is a manager or has unique skills associated with the business, the application is quickly reviewed and is normally approved. This has two benefits: the foreign founder offers a key employee a chance to gain experience working in the U.S., and the transferred employee brings the founder’s attitudes and priorities to the start-up entity.
9. Taxes, Payroll and Accounting
In the U.S., there are federal and state corporate income taxes; there are employer and employee taxes; there are workers’ compensation and family leave assessments; there are sales (not VAT) taxes, and there are pre- and post-tax contributions to retirement accounts (made by the employee, employer or both). Some must be paid weekly, some monthly and others quarterly. All carry with them criminal liabilities for non-compliance. The correct calculation of these liabilities, and the timely payment of them to the many agencies charged with enforcing them, can only be achieved with the assistance of trusted payroll processors, accountants and tax preparers.
What about Subject Matter Experts?
To operate an entity in the U.S., a foreigner faces the struggle of understanding an unfamiliar business environment. But assumptions and practices brought over from the home country can also prevent success. Doing things correctly the first time, and planning to do the things you didn’t know would have to do, can save tens of thousands of dollars in taxes, administration costs and wasted time. Having a pool of subject matter experts to consult as needed is one of the best ways to do that.
- David Reed, President of Reed Business Law and General Counsel at BioPortUSA
- Mark Lesselroth, President and CEO of BioPortUSA
Compliments of BioPortUSA – a member of the EACCNY.