- US requires consideration for agreement to be enforceable.
The concept of a Deed (an Agreement without consideration) does not exist in the US and unless the agreement involves “consideration”, the agreement will not be enforceable. So don’t get your US business partner to sign a Deed, he or she will give you a strange look and it won’t provide you any protection.
Remember, consideration does not have to be money, but does have to be an inducement to perform. It can take the form of money, services, physical objects, promised actions, or refraining from a future action, etc.
- Paper size
The US uses US Letter size paper which is 8.5 x 11 inches. That is 0.2 inches wider and 0.7 inches shorter that A4 paper. That means that the holes don’t line up in your binder and don’t fit in your plastic sleaves very well. It also means that you need to be careful when printing up documentation and formatting your agreements. Make sure your pdf documents have wider boarders to account for the differences so your US counterpart doesn’t accidently cut off some important terms when he / she prints.
- State tax in the US
If you are going to the US you will probably be considering registering your company in a state with no or little state taxes. Be aware that you still may be subject to taxes of other states and may have to register in each state in which you do business.
You will incur income tax in a state if you create a “nexus”. California, for example may impose income tax based on economic activity in the state, despite the fact that your business is not physically located in that State. In other words if you are spending quite a bit of time in California making sales from your laptop on the beach, your business may find itself facing an extra 8.84% corporate tax.
You also need to be careful not to breach transfer pricing rules. For example, if you have a holding company in Nevada and a distribution company based in California, you need to make sure that the transactions between the two related companies are “arms length”. California regulatory body will be watching to see if you are trying to trap profits in Nevada.
Some states in the US, such as California, are more aggressive than other states when it comes to imposing sales taxes and other kinds of taxes on out of state legal entities and an little bit of business activity within the state may result in being subject to California taxes.
- How to deal with Dividends and remitting money home
The US Tax Code is one of the most complicated body of law in the US and paying dividends and transferring funds between a US corporation and Australian subsidiary or vice versa may feel like the business owner is navigating legal and tax landmines and is very dependent on corporate structure. Before paying dividends or transferring funds, the business owner will need to seek legal and tax advice to avoid unintended adverse tax consequences.
- Visa issues
If you are setting up a business in the US, then you will need to secure a visa. One common visa is the E2 “investor” visa. In order to satisfy the requirements you will need to show that you have made a “significant investment” in establishing the US operations. There is no minimum threshold of what constitutes a “significant investment.” The CIS and the US embassy in Australia will evaluate the level of investment as it relates to the type of business being set up. The big hurdle is that you generally need to make the investment first before qualifying for the visa. As a result you always run the risk of making the investment and then been denied the visa even after the investment is made.
- Change in tax reporting periods.
In the US, the big tax date is April 15 to file for the previous fiscal year; however, extensions can be obtained easily. In Australia end of financial year is 1st July and must be filed by 31st October. If you are operating in both the US and Australia, this can cause problems. There is a way to change the reporting year in the US by filing a simple form to coincide with your Australian business which may simplify tax reporting for your transnational entity.
- Breach of contract
In Australia “costs follow the cause”. As a result, generally you can still claim legal costs if you are successful in litigation, even if your written or even oral agreement is silent on the issue of costs. In the US your right to claim costs is not assumed but rather the right must be derived from the subject agreement that is at issue in the context of commercial litigation or a statute, rule or law depending on the claim. As a result, most legal entities entering into agreements in the US usually address legal costs in their commercial agreements.
- Enforceability of Australian judgements.
In Australian we have the “Foreign Judgements Act” which sets out what courts are recognised in Australia and what foreign courts we can enforce our judgements.
In the US, foreign country enforcement of judgment is usually based on the principle of comity. Comity is the mutual deference between courts in different countries. Most courts in the US will unilaterally enforce a foreign country judgment, without proof of diplomatic reciprocity, either under judge-made law or under specific statutes. However, recognition will be generally denied if the judgment is substantively incompatible with basic legal principles in the recognizing country. As an example, US courts will not permit enforcement of foreign libel judgments unless the foreign country protects the right of freedom of speech to the same extent as the US constitution.
- Employment law
The majority of US states recognize and enforce various forms of non-competition agreements. A few states, such as California, completely prohibit non-competition agreements except in limited cases, which are the following: (1) where the owner of a business is selling the entire business, or is selling the goodwill in the business, the seller may be bound by a non-compete clause; (2) when there is a dissolution or withdrawal of a partner in a partnership; and (3) where there is a dissolution of a limited liability company. Since non-competition agreements vary from state to state, it would be wise to consult with a US attorney familiar with state employment laws.
- Comparing corporate structure
The choices and creation of legal entities in the US are governed by state law. Therefore, different states may have different options to choose from and this may affect a business owner’s decision on where to incorporate their business. Speaking generally, most business owners typically consider forming a corporation or limited liability company. Both offer the same amount of limited liability but have many differences that go beyond this article and the advice of an attorney is highly recommended. At a very high level, some of the differences between a corporation and a limited liability company are the following:
The owners of a corporation are shareholders while the owners of an LLC are members. An LLC has more flexibility to distribute percentage ownership to its members without taking into consideration the member’s capital contribution to an LLC. This becomes important when profits are distributed to the members. Although a member may not have invested as much capital as other members within the LLC, an LLC operating agreement may specify that all members receive an equal share of profits and losses. So in that regards, an LLC is more flexible than a traditional corporation, that would have to create a different class of stock to accomplish the arrangement described above and make the corporation ineligible to receive “pass-through” tax treatment.
In addition, an LLC generally has a more centralized management structure. Any member can act as the LLC manager or the LLC can also elect to appoint a third party manager. In contrast, a corporation must have a board of directors that manages the corporation and elect officers to run the day-to-day business of the corporation. The shareholders remain separated from the business and only get to weigh-in on major corporate decisions and to elect the board. Shareholders can be elected as directors and appointed as an officer of the corporation.
There are many other differences between a corporation and LLC, and there are various ways to set up a corporation, LLC and any other legal entity that might be appropriate for a business owner and a consultation with a knowledgeable US corporate attorney is recommended.
Special thanks to our Lawyers Associated Worldwide (LAW) member firm, Klinedinst, San Diego, California office and firm shareholder Mariel I. Estigarribia for her assistance in preparing this summary
