Foreign nationals with an interest in expanding their businesses in America often find themselves trying to navigate a complicated regulatory scheme from applying for visas to understanding U.S. laws. With clients in Europe and Africa we sometimes deal with business setups in the U.S. by foreigners and the legal issues associated with that process. We assist our clients in managing this process from visa applications to setting up internal stock option plans to compliance with local and federal laws in connection with the offering of unregistered securities. Through repetition of this process we have come up with six common issues that foreign entrepreneurs looking to setup businesses in the U.S. should consider.
Is there a particular visa available for foreigners who wish to start a business in the U.S.?
Yes, there are 2. First, the E-2 visa is a great visa for foreign nationals who wish to start a business. To qualify for this visa you: (i) must be a national of one of the treaty countries, (ii) have invested or actively in the process of investing in the U.S., (iii) must make a substantial investment (while it remains unclear what the threshold is for this figures range from as low as $50,000), and (iv) must intend to return to your home country after the expiration of the visa. As an alternative to the E-2 visa you can apply for the EB-5 visa, which has less stringent requirements with respect to nationality but has a financial investment requirement of $1 million (that amount is halved for investments in rural areas) and requires you to create at least ten full-time jobs. There may soon be a third option as the government has yet to decide on the startup visa, which would allow foreign entrepreneurs who have started a business to remain in the U.S. if they hit certain predetermined milestones. When advising our clients on visa issues we engage Scott Legal Services for support, one of the premier firms on advising on business immigration issues.
Are there any restrictions on the type of business entities I can choose?
We advise our foreign national clients who want to start corporations to register a C. Corp, especially those not yet resident in America; an S. Corp. can only have its shares held by U.S. citizens and resident aliens. Furthermore, there are times when our clients want to remain a foreign business with a U.S. branch and a foreign business cannot elect to be treated as an S. Corp. Even if you are a resident alien a C. Corp. may still be advisable. To the extent you intend to start a business and later seek venture funding, a C. Corp. is an attractive investment vehicle for venture capitalists when you look to raise funds in later rounds.
Are there any special tax burdens for foreign businesses that want to operate in the U.S.?
Your corporation will be taxed at the same rate as U.S. corporations. In the case of a C. Corp., the entity will be subjected to two levels of tax, first at the entity level and then at the stockholder level when earnings are distributed. Your business will be subject to tax at the same rate as U.S. corporations (currently 35%) on income that is connected with your U.S. business. When operating abroad you should be mindful that a U.S. corporation is taxed on its worldwide income. In some instances a client may want to remain a foreign corporation while conducting business in the U.S. For tax purposes, a foreign C. Corp. will be subject to a 30% withholding tax on certain non-business income from U.S. sources. In addition, a foreign C. Corp. that is engaged in business in the U.S. through an American branch will be subject to an additional branch profits tax. There are other associated tax issues associated with the sale and disposition of real property by foreign businesses and other income that the IRS may deem “effectively connected.” These are complex tax issues that we advise discussing with a legal advisor.
Which jurisdiction’s laws do we need to comply with?
As a general rule, you must comply with the laws of each jurisdiction in which you conduct business. This means you must conduct your business in compliance with U.S. law and the laws of the foreign nation where you may solicit investors, have employees, or do business. Some of the key issues implicated in conducting business in multiple countries include ensuring ownership of your intellectual property is protected in each jurisdiction, local labor and employment law compliance as well as data privacy laws, as some jurisdictions have strict rules that prohibit the transfer of certain employee information. You should also keep in mind OFAC regulations while operating your business abroad. U.S. companies and persons, regardless of their location, cannot transact business with OFAC sanctioned persons, entities and jurisdictions without authorization. In addition, OFAC sanctions sometimes affect the operations of non-U.S. companies (e.g., where the company employs U.S. persons, or where the company is an affiliate or subsidiary of a U.S. company).
Finally, the U.S. Foreign Corrupt Practices Act covers the conduct of U.S. businesses in foreign jurisdictions. The FCPA prohibits, among other things, the payment of a bribe to a government official with the intention to influence an official decision or secure an improper advantage. Best practices and in fact the only practice should be continuous compliance with the laws of every jurisdiction where you conduct business.
Are there any U.S. securities or corporate laws I should consider?
Compliance with relevant state and federal securities laws is important to ensure that the unregistered shares you intend to issue will be exempt under the Securities Act of 1933, as amended. The most popular exemption from registration is found under the Regulation D safe harbor of the Securities Act under Rule 506. Rule 506 allows issuers to offer securities to an unlimited number of accredited investors to raise an unlimited amount of capital. In connection with the offer of unregistered securities you should remain aware of the “Blue Sky” laws of the different states where you offer unregistered securities for sale. Along with federal securities laws some states have their own securities laws that have separate requirements. For example, if you are issuing unregistered securities in California you will also need to comply with Section 25102(f) of the California Corporations Code.
Are there any special laws concerning employees and their compensation?
There are state and federal laws that control option plans and equity grants. Some of these provisions remain applicable to foreign employees and also those who may move to the U.S. at a later date. At the earliest phases of establishing your new U.S. business it is important to be mindful of U.S. regulatory compliance related to employee compensation. For example, foreign persons receiving restricted stock should consider making an 83(b) election (for recognition of tax on purchase date) if such persons may relocate to the United States prior to the time the stock fully vests or are otherwise subject to U.S. taxation. The filing must be made within 30 days of issuance of the stock. The short filing deadline is not extended and there is no relief for persons who were not U.S. taxpayers at the time of purchase of the stock. For more on equity compensation considerations you can read our article on the topic by clicking here. As a related matter, you should have all employees and independent contractors you work with sign an intellectual property assignment agreement when performing work for your company.
The foregoing is just a shortlist of some of the many issues you will face when starting your business in America as a foreign national. If you are a foreign national looking to expand your business in the U.S. and need legal advice on these and other issues associated with establishing a business please feel free to contact one of our attorneys at email@example.com or visit our website at www.rbernardllp.com to learn more about our practice and find out how we can help you start your new business. Follow us on Twitter.