8 Legal Strategies For Foreign-owned U.S. Companies – Corporate/Commercial Law

8 Legal Strategies For Foreign-owned U.S. Companies – Corporate/Commercial Law

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Tips for foreign-owned U.S. companies to reduce legal costs
and risks as recovery takes shape.

All companies large and small, domestic and international, have
been affected by the international Covid-19 pandemic. The pandemic
has caused extensive disruption to international travel and
commerce, led to delinquencies in rental payments and other debt
obligations, lay-offs, international visa and tourism restrictions,
and numerous other economic hardships.

In the United States, two rounds of Small Business
Administration
Paycheck Protection Program
(PPP) loans have been granted to
many companies, including foreign-owned U.S. companies. In many
cases, the loans have been forgiven by the SBA and do not need to
be repaid, alleviating some of the financial strain from the
pandemic.

Although some industries have been hit much harder than others,
the pandemic has put particular stress on international businesses
operating in the U.S. There is, however, light at the end of the
tunnel.

With the mass Covid-19 vaccination efforts in the United States
and around the world, there is every reason to expect that many
foreign-owned companies may be able to ramp up or expand U.S.
operations soon. As the world opens back up, foreign-owned U.S.
companies can take steps to rein in costs and sidestep potential
landmines in a post-Covid environment.

Reduce tax costs related to Delaware incorporation

Most foreign-owned U.S. businesses are incorporated in Delaware
for various corporate and tax reasons. Not every
Delaware-incorporated entity, however, is paying the appropriate
Delaware franchise tax.

If a foreign parent is the sole or primary owner of the U.S.
subsidiary, there is no reason why the U.S. subsidiary should pay
more than the minimum franchise tax of $175. There are numerous
instances of small- to medium-sized U.S. subsidiaries that are
paying much more than $175 in annual taxes, in some cases as much
as $40,000 in annual franchise taxes.

This excessive tax is the result of the type of share structure
used when the U.S. subsidiary was formed. A share structure which
encompasses separate classes of stock, such as common and
preferred, or having millions of authorized shares, will generally
result in a high franchise tax bill from Delaware. While such a
share structure may be appropriate for a growth company that is
raising capital from venture capital and private equity investors,
it is usually a poor choice for a foreign parent-owned U.S.
subsidiary.

Any U.S. subsidiary that is paying more than $175 in annual
franchise tax should strongly consider changing its share structure
with an amendment to the certificate of incorporation. Cost savings
can also accrue in having the U.S. subsidiary serve as its own
registered agent, rather than paying a third-party for such
services. While not possible in all states (including Delaware), it
is an option in many states and can result in substantial savings,
especially if the U.S. subsidiary is qualified to do business in
multiple U.S. states.

Capture state business tax incentives

It is tempting to view the United States as one large nation,
but from a legal and corporate perspective, the United States is
more like fifty smaller nations. States often compete against each
other, using tax incentives and rebates to attract businesses that
plan to create jobs in that state. This includes foreign-owned
businesses who should compare and contrast the cost of doing
business in one state versus another. Foreign companies who take
advantage of tax incentives and rebates can substantially lower
their costs to enter new markets and accelerate growth.

Adopt WCAG 2.0 standards for websites

Unfortunately, in some areas in the United States, law
enforcement has become the province of aggressive plaintiff’s
lawyers rather than federal or state government attorneys. One such
instance is digital website accessibility compliance.

In short, many U.S. courts have ruled (and the Department of
Justice has taken a similar position) that websites are public
accommodations under the Americans With Disabilities Act (ADA).
This means that websites used in the U.S. should have screen reader
technology to accommodate blind individuals, among other
things.

While to date there is no definitive legal requirement that
websites must comply with WCAG 2.0
industry guidelines
(Guidelines), many courts have ruled that
such Guidelines provide the required accessibility standard.
Furthermore, many U.S. states have issued guidance adopting WCAG
2.0 as the required accessibility standard.

While the WCAG Guidelines are not inexpensive to implement,
failure to comply with them gives aggressive plaintiff’s
lawyers an opportunity to demand a quick settlement with the threat
of a costly legal action against the foreign-owned company. While
each circumstance will be different, plaintiff’s lawyers
threaten, and sometimes commence, legal actions against companies
that they believe are violating the public accommodation
requirement of the ADA. Therefore, every foreign-owned U.S.
business should consider adopting the WCAG Guidelines to reduce
long-term risk.

Comply with California’s Proposition 65

Enforcement of California’s
Proposition 65
is another example of predatory plaintiff’s
attorneys’ taking advantage of foreign-owned U.S. companies.
Formally known as the Safe Drinking Water and Toxic Enforcement Act
of 1986, this broad law requires businesses to add warnings and
disclaimers for a wide variety of substances, products and goods.
For example, California consumers must be provided with a
“clear and reasonable warning” of exposures to certain
chemicals determined by California’s Office of Environmental
Health Hazard Assessment (OEHHA) that have been found to cause
cancer, birth defects, or other reproductive harm.

While these warnings are beneficial for consumers, they are
onerous on companies. Any foreign-owned manufacturer who is selling
products in California should assess the need to comply with Prop
65. Plaintiff’s lawyers will monitor any company doing business
in California who is not providing necessary warnings and
disclaimers and try to extract settlements, threaten legal action,
and commence costly lawsuits against businesses that they believe
have violated Prop 65. In most cases, it will be more
cost-efficient for a foreign company doing business in California
to, early on, review and take preparatory steps to comply with Prop
65, if applicable.

Negotiate early lease termination provisions

Various states have passed rent relief programs and laws
addressing the Covid-19 pandemic and the inability of some lessees
to make rental payments. The vast majority of these programs
protect residential tenants, not commercial tenants.

Among states that have laws protecting tenants from eviction,
these laws protect residential tenants almost exclusively.
Commercial tenants largely must fend for themselves.

Many foreign-owned U.S. business do not aggressively negotiate
commercial leases before they sign the leases. This is a missed
opportunity, as legal clauses addressing early termination and
force majeure can, quite literally, save a company tens of
thousands of dollars if an early exit is required. Foreign-owned
U.S. subsidiaries should take the time to evaluate whether early
exit options exist in their leases. Landlords may be more willing
to make accommodations in this Covid-19 environment.

Select the correct legal U.S. entity

Foreign companies who enact a corporate structure without the
advice and guidance of an international business attorney often
select the wrong legal entity. The limited liability company (LLC)
is the most popular legal entity for businesses in the United
States because (i) income and losses flow directly to the owner
thereby avoiding double taxation and (ii) its general
flexibility.

LLCs are usually not a good vehicle for initial U.S. entry
however (absent some tax consideration in the foreign company’s
home jurisdiction). A single-member LLC implicates the U.S. branch
profit tax, in addition to U.S. income tax. Moreover, an LLC
requires the foreign parent to prepare the U.S. tax return and puts
the foreign parent at risk of U.S. liabilities for any errors.

Many foreign companies who do not obtain proper legal advice
upfront later devote considerable expense and time to converting an
LLC to a c-corporation or other legal entity. Any foreign-owned
business in the United States who has not yet incorporated a U.S.
subsidiary should take time now to evaluate U.S. entity information
and make the correct determination.

Hire workers U.S.-style

Many foreign companies are tempted to adopt their existing
employment practices in the U.S. to keep administrative costs down,
lessen organizational complexity, and make use of existing
employment terms and concepts. U.S. employment laws, though, are
different from employment laws in most Western countries.

There are several key differences. The United States largely
relies on freedom of contract with respect to negotiation of
employment terms. Having a properly negotiated U.S.-specific
employment agreement is the best way to reduce future legal
exposure (many states have enacted separate statutes protecting
employees so those should be considered as well).

The United States also has at-will employment. At-will
employment means the ability to terminate an employee without
notice, without cause, and without severance. While many foreign
companies hire employees at-will for their U.S. subsidiaries, the
foreign companies often fail to understand that at-will employment
can easily be defeated by extraneous promises in emails and other
communications.

In addition, foreign—and U.S. — companies sometimes
misclassify workers as independent contractors instead of
employees. That is a fast way to risk a state audit. Foreign owned
business should evaluate all of these employment considerations in
the present climate to reduce U.S. legal exposure.

Assemble a mix of foreign and U.S. stakeholders

The United States is a business friendly nation. With some minor
exceptions, a foreign company can quickly incorporate a U.S.
subsidiary without worrying about residency requirements for its
officers or directors.

Many companies operate under a full slate of officers and
directors who are residents of their foreign jurisdictions. This
practice can potentially reduce U.S. contractual and employment
obligations, especially U.S. employment liabilities, which can
become a huge cost to a foreign-owned business.

There can be discernible benefits in having at least one U.S.
individual as a director, officer or key employee. After the 9/11
terrorist attacks, U.S. banks have become much more reluctant to do
business with foreign companies unless the foreign company complies
with numerous and cumbersome documentation requirements. These are
based on various laws, regulations, and internal policies, such as
the “Know Your Customer” anti-money laundering provisions
of the
USA Patriot Act of 2001
.

The most cost-efficient option to continue with a foreign
company’s U.S. operations is often a combination of foreign and
U.S. directors, officers and key employees. Affiliation with a U.S.
person can make the interactions with the U.S. bank more efficient
and seamless. It can also reduce the number of long-distance visits
needed by the foreign company’s principals.

Foreign-owned U.S. businesses who follow these tips can reduce
costs and legal risk in a post-Covid environment. By timely and
accurate execution of a mix of these strategies, foreign-owned U.S.
businesses are likely to accelerate their recovery and growth.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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