CORPORATE TRANSACTIONS & COMPLIANCE BLOG

Coming to America: Qualifying a Non-U.S. Entity or Incorporating a New Subsidiary in the U.S.

By: Teri Mayor, COGENCY GLOBAL INC. on Mon, Oct 06, 2014

Incorporating in the USIn the global economy of the twenty-first century, an increasing number of non-U.S. entities are choosing to have a presence in the United States. These entities have two choices in how to proceed: qualify the existing entity to do business in one or more states; or form a wholly-owned subsidiary of the entity in one state and perhaps qualify the subsidiary in additional states.

Considerations to Discuss with Legal Counsel

When deciding how to proceed, there are several main issues to address with competent legal counsel:

  1. Does the entity need to formally qualify or incorporate in the U.S.? The pertinent entity statute of a particular state will define what constitutes doing business in that jurisdiction.

  2. What treaties exist between the entity’s home nation and the U.S. that may impact business or the public filing requirements?

  3. What, if any, are the tax implications, including income, franchise and elements under the Foreign Account Tax Compliance Act (FATCA)? In particular, limited liability company taxation can be complicated and will vary from state to state.

Forming a New Entity

Creating a wholly-owned subsidiary by forming a new entity in the U.S. can be a straightforward filing process. Choosing which U.S. jurisdiction in which to form the new entity will be based on business needs, geographic location, tax considerations and other economic issues. California and New York are high volume business-formation destinations based on the large metropolitan/financial centers in each state. In contrast, Delaware and Nevada are high-volume because they are known to be “business-friendly” jurisdictions. Still, it is important to investigate the chosen jurisdiction fully, in consultation with legal counsel. For example, corporation-friendly Nevada has incorporation fees as high as $35,000 and annual license fees as high as $11,100, depending on the corporation’s capitalization. In comparison, California has a corporate franchise tax with a top rate of 10.84% (for banks and financial corporations), no license fees and the incorporation fee is a flat $100.

Qualifying the Existing Entity

As with forming a new subsidiary, the choice for qualifying an existing non-U.S. entity is based on the needs of the business. Each state has its own statutory requirements but, in general, an entity is required to file an Application for Authority or other document and provide proof that it is an existing entity in its home jurisdiction. The “proof” is normally in the form of a Certificate of Good Standing or existence. Obtaining this documentation can be the largest challenge in the process, given the variation in government recordkeeping worldwide.

Tolerance for Variation by U.S. Jurisdictions

A Certificate of Good Standing is not a standard international document. Many nations offer other types of documentation, including certified copies of recorded documents or printouts of the recorded document history. Tolerance for variation in documentation from non-U.S. jurisdictions can vary greatly from state to state. For example, Nevada requires no documentation; however, New York may require certified copies of all documents registered plus full translation when the non-U.S. jurisdiction does not provide a Certificate of Good Standing or existence.

Examples of Documentation Accepted from Non-U.S. Jurisdictions

Thanks to The Hague Convention Abolishing the Requirement of Legalization for Foreign Public Documents, documents from many nations can be accepted for use in the U.S. with the attachment of an apostille. The United Kingdom and Hong Kong, high volume sources of non-U.S. qualifications, offer certificates which are signed or sealed by government officials, not requiring apostilles, and frequently accepted by U.S. jurisdictions. The federal registry and the provincial registries in Canada also offer U.S.-compatible documentation. China, which is becoming an increasingly high-volume source for non-U.S. qualifications, issues a certified corporate history with registration information under seal of the government, usually acceptable in U.S. jurisdictions. Using a service company versed in international document retrieval can help in navigating the maze of available foreign government certifications.

Best Practices

Given the many variables in choosing whether to qualify a non-U.S. entity to do business in the United States or to incorporate a subsidiary, it is important to research the process first. You should know the public record requirements in the home jurisdiction of the entity and in the chosen U.S. jurisdiction. You should also understand the business environment, including the tax implications of doing business in the U.S., especially in the particular state chosen for qualification or incorporation. Most importantly, all decisions should be made in consultation with a knowledgeable attorney.

 

This article is provided for informational purposes only and should not be considered, or relied upon, as legal advice.

Topics: International Corporate Services