FOUNDING A COMPANY IN THE US

The United States is one of the world’s largest economies, so it’s certainly worth taking a closer look at the US market. Many companies already have experience in the US market, whether through direct sales or via distributors or agents. Products manufactured by German-speaking companies remain very popular in the US thanks to their technological superiority and high quality. There are therefore enormous growth opportunities for German-speaking companies in the US. As a result, the big question for company managers is how to open up the US market with minimum possible risk. We’ve provided a brief overview of the issues below.

Forming a subsidiary

Incorporating a company in the US offers the parent company the opportunity to pursue the goals mentioned above, since in contrast to Germany or Austria, a US subsidiary can be set up with far less effort and in just a few days. This is generally considered to be the best option, as it offers extensive advantages at comparatively low costs.

Limiting the liability of the parent company

Perhaps the most important aspect of founding a company in the US is limiting liability: in order to protect the assets of the parent company, it should not operate directly on the US market. Instead, it should conduct all business relations with US customers and contacts through the US subsidiary that is established.
This ensures that contractual liability ends with the US subsidiary. Proper administration of the US subsidiary generally protects the parent company from liability. The fact that the subsidiary is a separate entity also enables the German parent company to send its own employees to the US under an appropriate visa to grow and/or manage the US company. The US company serves as a sponsor to help the employees obtain a visa.

Name of the subsidiary

Before forming the subsidiary, it is advisable to first check whether the name intended for the American company is available and can be used as such in the US for the new company that will be founded. An important part of the name is the word “corporation,” “incorporation,” or “limited,” or a corresponding abbreviation (Corp., Inc., Ltd., or LLC). Unless one of these is included, there is a risk that shareholders may face unlimited liability.
General considerations relating to the name should then be followed by a more specific examination of the question of trademark protection if the name is also intended to be used as such in the United States. Under US trademark law, the use of the name in business transactions takes precedence over registration. If it later transpires that the name chosen for the American company has already been registered as a trademark or has already been used previously by a third party in business dealings in the US, this name is then deemed to have already been taken and is protected. To avoid this, we generally advise that companies conduct a comprehensive name and trademark search. The same applies to the intent to use a particular logo or design in the United States.

Suitable company forms

The US company being formed should be a company with limited liability in order to achieve the protection against liability for the parent company that we outlined above. Two options are a C corporation (Inc. or Corp.) or a limited liability company (LLC). It should be noted here that the term “limited liability company” has nothing to do with the German or Austrian GmbH, although the term’s translation is the same in English.

Differences between a C corp and LLC

When comparing the two company forms, the LLC can be more expensive to set up than a C corporation (for example, due to the publication requirement in New York, the need for an operating agreement). By checking a box, there is the option to classify the LLC either as a corporation or a partnership. An LLC may offer tax advantages in certain circumstances. Since corporate law in the US is the remit of the individual states, it then becomes problematic if other states refuse to recognize the legal form (as an LLC) because the criteria for recognizing it as such are different there. As a result, the process of classifying the company as a corporation or as a partnership may go differently than intended or planned, which, of course, then has tax consequences. This problem doesn’t exist when a C corp is set up, as this legal form is recognized in all states without any restrictions.
It is therefore advisable to carefully examine the differences between these two company forms under corporate and tax law in terms of the relationship between the parent company and the US subsidiary.

Tax considerations when founding a US subsidiary

By setting transfer prices between the parent company and its US subsidiary optimally, as well as through various other mechanisms (such as licensing fees for trademarks and patents, advertising campaigns, product documentation, etc.), the US subsidiary’s profits can be reduced, and the dividends transferred to the parent company without deducting taxes at source. This is a benefit of the German-American double-taxation agreement.
The crucial factor for success in the United States is, ultimately, commitment to the US market. A German-speaking company can combine two critical factors by operating a US subsidiary. First, the product can be advertised as “Made in …” Second, the product can be distributed through structures that US customers recognize and are familiar with, such as a US legal form and corporate officials such as a president, CEO, secretary, etc. This will make it much easier for US customers to purchase the foreign product, as they will have access to a local contact person and services.

Selecting the state of incorporation

The location of the company’s registered office is less important under US law than in Germany or Austria. The company should be incorporated in a state in which the laws for companies – which are essentially governed by state law– are more “liberal,” such as in Delaware. This is because the law of the state of incorporation is decisive when it comes to internal questions concerning the company. Delaware also offers the advantage that the legal system there is well known for historical reasons, so judges and lawyers are familiar with it. Otherwise, the decision can be based on where the focus of the company’s activities will be, or where the organizational center of the company is located, and the company can then be established there at the local level.
If the company’s activities extend beyond the borders of a single state, it should be incorporated in Delaware, with the process of “qualification” (i.e., local registration as a “foreign corporation”) then being carried out in the states in which more intense corporate activities develop or exist. The corporation is only “locally” recognized once it is registered in the respective state, which means it will then have access to the state courts of the respective state as well. Otherwise, the corporation is limited to appeals to federal courts in states in which it is not registered.
Corporate law in Delaware is considered to be generally more flexible and liberal than in other states. In principle, submitting entries, registrations, applications, and reports online is very simple in this state. For example, shareholders’ meetings can alternatively be held as conference calls if there is consensus to do so. This is particularly advantageous for shareholders who are not based in the US and basically simplifies the process of conducting shareholders’ meetings.
There is also more anonymity when registering companies in Delaware, an aspect that is appreciated by some corporate bodies.

Procedure for founding a company

a) Articles of incorporation/certificate of incorporation
The first step in setting up the company is drawing up the articles of incorporation (which are also called the certificate of incorporation in some states). These determine the name of the company as well as the classes of shares (for example, Class A or B, which determines whether or not the holders have voting rights). If the company is to have only one shareholder, the class of shares is irrelevant. Unlike in Germany or Austria, the number of shares can be set at will. When a corporation is formed in the state of Delaware, 1,500 common shares with no par value are usually registered for issuance (this is known as “authorization”). These shares can then be distributed accordingly among the participating shareholders and issued, either in full or only in part. Of course, the company may also be authorized to issue more than just 1,500 shares.
The articles of incorporation are signed by the founder(s) and filed with the secretary of state of the state where the company is incorporated – similar to the Commercial Register in Germany or Company Register in Austria – and the founder does not have to be the same person as the shareholders. The incorporation is therefore often carried out by a lawyer or a service company. Once the articles of incorporation have been filed in a legally compliant manner, the incorporation fees have been paid, and a confirmation of registration has been issued, the company is deemed to be incorporated. This process takes around 24–48 hours in Delaware.

b) Appointing the members of the supervisory body, or board of directors
In addition, the company has a supervisory body called the board of directors, which has to make and sign off on all important decisions. The names of the founding members (directors) of the board are to be listed on the registration in the state of Delaware. To avoid a potential stalemate in voting, we suggest that – wherever possible – companies always appoint an odd number of directors so that votes can always be decided by a majority. The makeup of the board of directors can, of course, also depend on the shareholders and their shares in the company.
During the incorporation process, the founder appoints the initial members of the board of directors, and his or her duty as founder ends with their designation.
In principle, the board of directors is not intended to represent the company externally – that is the president’s job (similar to the managing director/board in Germany or Austria) – and should not conclude any contracts, either. The board of directors in fact acts as an internal body and defines the framework of the company’s policies. In this function, however, the board of directors decides which contracts should and can be signed. That is to say, it votes “yes” or “no,” but generally does not say “how.”
At a minimum, a majority of the members of the board of directors need to have participated in the voting in order to constitute a quorum. At least a simple majority of the participating members must vote in favor of the resolution to be implemented. Board resolutions may also be passed by phone or in writing with a unanimous consent resolution. However, combining a phone meeting with written consent is not an option. Transferring voting rights by authorizing a third party to cast them is not permitted – unlike in the United Kingdom, for example. If a board of directors’ resolution is to be effective in cases where not all of the board members are present, either all of the members must have been notified in writing of the meeting or the absent members must have submitted a written waiver forfeiting their right to attend. A waiver of this type may be issued even after the meeting has been held.

c) Appointing other bodies
The board of directors then appoints officers (i.e., executive bodies), who have to oversee the general operation of the company. They act as representatives of the company and conclude contracts on its behalf as well as taking care of the company’s operational business. The officers are usually referred to as president, treasurer, and secretary. However, a company often has vice presidents as well. The officers are also often given the titles chief executive officer (CEO), chief operating officer (COO), or chief financial officer (CFO).
The president or the other officers do not need to be permanently present at the company’s premises, so this role could also be performed by a person abroad. However, it is important that a representative (that is, a manager or similar) can take care of local operations if this appears expedient for practical reasons. Neither an officer nor a director needs to be present locally for the formalities involved in incorporating the company.

d) Articles of association and shareholder agreement
The exact organization of the company – corporate structure, appointment of officers and directors, and the way management is organized – can then be agreed in more detail in a shareholder agreement once the company is established. This makes sense if there are several shareholders. The bylaws, or the company’s articles of association, also need to be defined.

e) Applying for a tax number
Once a company has filed and registered, an application for a tax number (employer identification number, EIN) should be made immediately. This is also a prerequisite for other steps, such as opening a bank account for the company.
Starting capital
The company is not required to have a minimum amount of capital. The role of US law is primarily to limit the risks to shareholders, not to advance the interests of their lenders. Each lender must verify the company’s solvency itself and, if there is any doubt of its creditworthiness, demand a guaranty from the company or a bank.
For capitalization purposes, sufficient funds are often initially allocated to cover anticipated costs for approximately the first six months. Part of this amount is known as the subscription price. Depending on the requirements, the shareholder(s) then transfer(s) additional funds to the company during the remainder of the year. In doing so, the shareholder(s) has/have to decide what proportion is to be considered as equity and which as a loan. The board of directors then adopts a resolution to this effect.
Risk of piercing the corporate veil
It should always be ensured that the company is not undercapitalized at the outset, as there is otherwise a risk of piercing the corporate veil. Various criteria may constitute a risk of piercing the corporate veil of the parent company or shareholder, such as:

• Mixing assets belonging to the company and shareholder
• No separate bookkeeping for the company
• No proper documentation of corporate records or inaccurate documentation
• Interference in the independent administration of the company by the management of an affiliated company, with the result that the company cannot make certain independent decisions, or can make them only with difficulty;
• Substantial undercapitalization of the company

Piercing the shareholders’ corporate veil essentially amounts to claiming that the company is merely an alter ego of the shareholders, and the above criteria will then be referred to. The more criteria apply, the easier it is to argue that an alter ego situation exists, and hence the higher the risk of piercing the corporate veil.
Reducing capital and repaying shareholders is easier than in Germany or Austria. The reduction in capital is not subject to any disclosure requirements. Instead, the relationship between equity and debt is important for tax reasons, and a ratio of 1:3 should be maintained.
A company’s insolvency is also treated differently than under German or Austrian law. The company is not obliged to issue a notice in the case of insolvency. Rather, it can continue its business until it makes a profit again. At the same time, it can also seek protection from lenders by voluntarily filing for bankruptcy. However, insolvency proceedings are carried out without the company’s involvement if enough lenders request this to protect their rights.
In terms of the minimum number of company organs, for example, the number of members of the board of directors and the number of officers, only one director is required for the board of directors. And while at least one president, one treasurer, and one secretary are required for the officers, these roles can be held by a single person simultaneously. It is thus possible for the company to be formed by only one person, and then to have only one person who both acts as sole director and assumes all three officer positions that are required as a minimum.
Once all positions in the company organs have been filled, the company will be capitalized on the basis of a business plan. The US company is then considered to be established and can commence operations, so all sales in the US can be conducted through the company.

Place of jurisdiction, procedural law

As a general rule, companies incorporated in Delaware can then also be sued under Delaware law. In the event of litigation, special judges are appointed in the state of Delaware for corporate or commercial matters (special jurisdiction: the renowned Court of Chancery) and not jurors as in many other states. Delaware presents itself as being far more litigation-friendly than other states. This is why eight out of ten Fortune 500 companies are incorporated in Delaware: they can expect better legal protection there in the event of a lawsuit. As a result, some 70 percent of all US companies are incorporated in Delaware, including Boeing, Microsoft, and General Electric.

Tax law considerations when choosing the state of incorporation

The following aspects also need to be considered when selecting the state of incorporation: generally speaking, what is known as the “source principle” applies to the taxation of the company’s income. This means income is either taxed in the state in which it arises (for example, if there are customers in California and the sales there are to be allocated to the company, then the company would have to file an income tax return in California), or the income arises at the location of the company’s registered office.

Public disclosures after incorporation

Unlike in Germany or Austria, there is no commercial register/company register in any US state. As a result, it is not obvious who the shareholders, directors, and officers are. Appointments of directors and officers and share transfers are not officially registered or announced anywhere. Similarly, the competencies of the officers cannot be viewed anywhere.
But for third parties, the possibility that an individual may lack power of attorney or be exceeding their competence isn’t generally of any significance, because the company is bound by an officer’s signature. The legality of the particular course of action and any claims on the part of the company against an officer acting without authorization are internal matters for the company.
Only in the event of extraordinary transactions must third parties protect themselves against actions that are taken without authority. For example, a legal opinion might confirm that a contract has been approved by the board of directors and that the president is authorized to sign.

Dissolving a company

Dissolving a company is far more difficult and time-consuming than its formation. This step is usually proposed by the board of directors. In most states, an implementing resolution by a two-thirds majority of the voting capital is then required. This resolution must be executed by filing a certificate of dissolution with the authority responsible for matters pertaining to company law in the individual state. The name of the company, the date of dissolution, and the names and addresses of the directors and officers of the company must be stated. In addition, the federal tax authorities and those of the individual states in which the company was active must be informed of the dissolution. Final tax returns must be filed to this end. After all creditors have then been informed of the dissolution and outstanding liabilities have been settled, the remaining assets can be distributed to the shareholders. The entire dissolution process can therefore take up to one year.