San Jose Business Lawyers Blog

Articles Posted in U.S. Market Entry

With the United States having an extraordinarily robust economy and the highest level of consumer spending in the world, many non-U.S. resident foreign nationals are justifiably interested in starting a business in the United States, but are not sure whether it is possible or where to begin. Fortunately, it certainly is possible, and in some cases, may even be accomplished without setting foot within the U.S. Below are some of the steps required for a foreign national who is not a U.S. resident to start a business.

Choose the state in which you wish to start your business

One of the first things that non-U.S. residents should understand about starting a business in the U.S. is that each state has its own laws regulating the way businesses are formed, the way they operate, and their tax treatment. While these laws tend to be very similar, there are often significant and nuanced differences that may have a significant impact on your ability to conduct business from overseas as well as your ability to minimize your tax liability.

Choose your business entity

Another aspect of starting a business in the United States of which non-resident aliens should be aware are the multitude of business entities under which one could potentially operate. These options often include the following:

  • Partnerships
  • S-Corporations
  • C-Corporations
  • Limited Liability Companies

These options have significant differences as well as certain advantages and disadvantages of which entrepreneurs should be aware. As a result, it is highly advisable to speak with a lawyer who is familiar with business entity formation in the United States prior to filing any paperwork.

Designate a person or entity as a registered agent

Most jurisdictions require that a business entity have a registered agent in the state. The registered agent acts as the person or party that can accept any official communication directed at the company.

Obtain a Federal Employer Identification Number (EIN)

In order to conduct business in the United States, your company will need to obtain an Employer Identification Number, or EIN, from the Internal Revenue Service. This number will allow your business to open bank accounts and file tax returns within the United States.  In many cases, obtaining an EIN can be complicated for foreign nationals, but there are often several ways in which an attorney can help expedite and streamline the process.

Open a business bank account

In some ways, this can be the most onerous steps of starting a business in the United States from overseas. In many instances, banks require a person wishing to open a bank account to be physically present at the time the bank account is opened, which can be difficult or even impossible for certain people who wish to start a business in the United States. Fortunately, there are often several options that may allow a business owner to operate without a U.S. bank account or open one without the cost and time associated with coming to the United States. An attorney familiar with business formation will be able to advise you as to your options based on your specific situation.

Starting a business in the United States or expanding an existing venture into the U.S. market can be a lucrative endeavor. While certainly possible, there are often many hurdles to overcome, and it can be extremely helpful for foreign nationals to navigate the process of starting a United States business with the help of an attorney. As experienced business formation lawyers, we have the skill and knowledge required to get your business up and running as soon as possible. To discuss your legal matter with one of our lawyers, call Structure Law Group, LLP today at 408-441-7500 or send us an email through our online contact form.

San Jose and Santa Clara are such vibrant places to do business that many foreign companies want to relocate to Silicon Valley. As a corporate lawyer working with start-up companies, I have helped a number of ventures enter the U.S. market, and have worked with companies from Australia, Canada, China, Denmark Finland, India, and Israel, among others.

In past blogs, I have discussed some of the threshold considerations faced by companies leaving their home countries and relocating in the U.S. I have also discussed some of the entity forms that companies can adopt when deciding to access the U.S. market merely to sell their products or services.

Companies that decide that they want to access the private equity markets and managerial and technical talent resident in Silicon Valley often relocate their headquarters here in the U.S. For these companies, a “flip-up” will allow them to grow their company in the U.S. by being in a position to access local capital and hire a sophisticated workforce.

A flip-up is essentially a corporate reorganization. At its simplest, owners of the foreign company will exchange their interests for shares in a U.S. company. When the transaction closes, the foreign company is a wholly-owned subsidiary of the U.S. company, and the U.S. company is owned by the former owners of the foreign company.

A successful flip-up will require coordination among a company’s U.S. and foreign tax advisors, legal advisors, and advisors for the foreign company’s stockholders.

Flip-ups occurring during the early stage of a company are typically easier to accomplish than late-stage flip-ups. This is because the number of affected stockholders is usually smaller, as is the number of outside relationships that require special attention. If a company is considering a flip-up and a financing transaction, it should flip-up first and then close the financing. Often, U.S. investors will require that a company flip into the U.S. as a condition to a funding transaction.

A related reason for engaging in a flip-up early is that older companies usually have a capital structure and stockholder agreements that can be challenging to manage through a transaction. Companies that have closed numerous financing rounds often are subject to constraints that add complexity to closing. These constraints include stockholder rights enabling particular groups to have veto rights over reorganization transactions, outstanding options, warrants, and other convertible securities, and large numbers of stockholders. In addition, securities laws compliance can become relatively more expensive because the laws of the jurisdiction where the issuer (i.e., the U.S. company) resides, and the laws of the jurisdiction where each of the stockholders reside, must be followed.

On the other hand, new companies may face unique constraints. For example, young foreign companies may have received government grants to help them develop technology and grow their operations. Because these grants often require that the company be owned by citizens of the funding government, the terms of each grant must be reviewed carefully to determine whether the terms of the grant will permit a flip-up.

Whether accomplished when the company is young or more mature, a flip-up’s structure needs to be carefully reviewed by experienced tax advisors to minimize or eliminate any tax impacts, particularly on the stockholders. This is particularly important because flip-ups rarely generate cash for any stockholders, and any tax liability would have to be paid out of a stockholder’s other resources. Tax advisors should also be consulted in connection with determining where the company’s intellectual property should reside for tax purposes after the flip-up is closed.

Flip-ups almost always require the approval of a company’s stockholders. This will require the company to review its stockholder approval procedures, especially any voting agreements that might exist, and any relevant law. Likely, there will be minimum notification procedures that must be followed. In addition, disclosure documentation may be required. The cost and time of each of these must be built into the transaction so that the parties have a realistic expectation of the closing schedule.

Flip-ups are one of the best methods for a company that wants to take advantage of U.S. private funding opportunities and enter the U.S. market. The earlier the company can make the decision to reorganize as a U.S. company, the easier the transaction will be for all concerned.

The information appearing in this article does not constitute legal advice or opinion. Such advice and opinion are provided by the firm only upon engagement with respect to specific factual situations. Specific Questions relating to this article should be addressed directly to the author.

In my last blog concerning market entry into Silicon Valley by foreign companies, I discussed some of the basic issues and tasks surrounding the effort. As an attorney practicing corporate law and representing technology startup companies, I am often asked to assist in designing and implementing the legal structures that enable a foreign-owned company to access the US market.

There are a number of factors that guide a company’s decision to enter the US market. First, what is it trying to sell? Second, does the company hope to generate its return on investment through a cash-flow from sales, or by building value and ultimately selling the company or taking it public? Third, does it need funding from US private investors? Let’s look at how each of these factors guide entity form.

The first factor focuses on the best method for product distribution. If the company is trying to sell simple, commodity type products using an established distribution network, it may be able to get by with no entity at all. In other words, it can sell its products directly into the US through a distributor or independent sales representative. Even if the product is complex, but does not require a sophisticated domestic marketing, sales, or support organization, an independent sales representative could be used.

Where the product requires more than a sales representative to adequately exploit the US market, the company will need to consider forming some kind of entity. This is where the second factor comes in.

If the foreign company only wants its US company to generate sales and build up revenues for possible distribution to the parent company, and does not expect to use profits to drive expansion, it should explore forming the US company as a pass through entity, such as a limited liability company or partnership. Subject to certain exceptions, this will allow the US entity to avoid income taxes at the entity level. The extent of the overall tax burden, however, to the company as a group will need to be explored with an international tax professional.

If, on the other hand, the US company is expected, among other things, to grow on its own, secure outside funding, or be sold to another company, then a corporation is the preferred entity. A corporation, particularly if incorporated in Delaware, is a well-recognized method of doing business and can be created and organized easily. The US company will also be able to use operational profits to grow without the phantom income issues associated with pass through entities, and can avail its stockholder of beneficial tax treatment if it is later acquired.

Foreign startup companies often outgrow their home market, and look to the US, particularly Silicon Valley, as a beachhead into the US. This is where the third factor comes in. Many of these companies have built their technology, and have generated sales that validate the market for their products. They are stymied in their home countries, however, by the lack of expansion capital and become attracted to the established and sophisticated private investor market in the US. Knowing that investors prefer to invest locally, foreign startup companies soon realize they must relocate their headquarters to the US. The process by which they accomplish this is often referred to as a “flip-up”, and will be the subject of a subsequent blog.

Analyzing basic distribution, return on investment, and funding requirements is necessary to determine the best approach to entering the US market.

The information appearing in this article does not constitute legal advice or opinion. Such advice and opinion are provided by the firm only upon engagement with respect to specific factual situations. Specific Questions relating to this article should be addressed directly to the author.

Silicon Valley is a magnet for foreign technology companies seeking to expand their offerings into the US market. As a San Jose-based attorney specializing in corporate law, I have seen an uptick in US-based management talent being solicited by foreign companies to help the companies start up their US operations. When faced with the question of what to do, many of the same issues arise in structuring the US market entry of foreign-owned companies.

The first issue is why the company is coming to the United States in the first place. If the company merely wants to sell widgets, it may be able to make do with a simple contractual relationship with a sales professional or distributor. If, on the other hand, the company wants to access US management talent and venture investors, it might look at reorganizing, or flipping-up, its legal headquarters into the US.

The second issue involves taxes. If the company is a mature company and expects to generate significant revenue from its US operations, there are a number of tax planning opportunities that may enable the company to minimize its international tax burden. Understanding the company’s existing structure and its goals, and designing an appropriate corporate and technology ownership and use structure is a necessary task. It can, however, be an expensive undertaking depending on the nature of the company and its products and services.

The third issue involves the need to allocate resources to basic housekeeping. For example, it is surprisingly time consuming for a foreign company to open a simple bank account. This is because an account will require, among other things, a Federal Employer Identification Number, and the IRS will require that an individual provide some form of US-recognized personal tax number. Although this is easy for a US citizen with a social security number, it is more difficult for a company with no US contacts. A foreign company will usually need to coordinate the filing with the IRS to determine precise requirements, and its own foreign agencies to secure the necessary documentation to satisfy IRS requirements.

Another important housekeeping task is assembling the necessary team of advisors. If the foreign company hopes to enter the market through a sales representative or distributor, its group of professional advisors can be limited to an attorney and an accountant. If the entry strategy is more involved, the advisor group will likely extend to international tax professionals and bankers, among others.

The fourth common issue is making sure the foreign company understands the dynamic US business culture, especially here in Silicon Valley, and the rapid swings prompted by the business cycle. Many foreign companies are enamored with the potential market size of the United States, but may not have the stomach for the roller coaster life of a US technology company. Any entrepreneur working with a foreign company must probe beyond the usual discussions to determine the amount of funding and other resources that the foreign company is willing to devote to the effort, and whether that funding will be provided all at once, or dripped over time.

The Silicon Valley area will continue to attract foreign technology companies hoping to establish a beachhead in the US marketplace. In an upcoming blog, I’ll discuss the legal structures that are often used in US market entry.
The information appearing in this article does not constitute legal advice or opinion. Such advice and opinion are provided by the firm only upon engagement with respect to specific factual situations. Specific Questions relating to this article should be addressed directly to the author.