10 March 2017
Guest article: America still is open for business
John Hendricks, a resource of B P Collins, is a founder of HendricksMurry, P.C., a boutique law firm in San Francisco, California, where he practices business and employment law. In the first of a two-part guest article series, John provides tips for UK-based businesses that are considering scaling up, organizing and funding businesses in the United States.
Recent events in Britain and America raise significant questions for businesses operating across international borders.
But our two countries’ historic closeness remains an asset and should be leveraged favourably by business.
In America, many fundamental and practical issues for businesses are governed and administered by laws set at the individual state level. These laws are not expected to change.
In California, Governor Jerry Brown last month noted that the state is “the sixth most powerful economy in the world” behind the UK and that “one out of every eight Americans lives . . . here.” Twenty seven percent of California residents were born outside the United States, so it continues welcoming business from all around the world.
Upon deciding to establish United States operations, the first important client decision is selecting a business entity appropriate for their needs. This typically means a corporation or a limited liability company (LLC).
Forming a corporation, a business entity analogous to a UK private limited company (limited by shares), requires capitalization by shareholders, designation of officers, drafting bylaws, identification of a registered agent, filing articles (or a certificate) of incorporation with a state’s secretary of state, and payment of fees. Thereafter, governing a corporation requires greater formality than an LLC, but a corporation may offer overseas owners tax and other benefits, although these are outside the scope of this article.
Alternatively, an LLC offers greater flexibility for management and operations, and is governed by a highly tailorable Operating Agreement agreed to by the company’s organizers. An LLC can provide desirable tax benefits to LLC owners, known as members, if they are based in the US. But an LLC potentially increases the tax burden on non-US members.
The second important client decision is selecting an appropriate state jurisdiction where a new company will be formed. Sometimes a desire to establish a physical presence in a particular city implies forming the business in the corresponding state, but this is not always the best option.
Rather, it may be desirable to incorporate in a more management-friendly state like Delaware, and then qualify the out-of-state entity to do business in California by registering it with the California Secretary of State as a “foreign” corporation. This choice will be driven by specific client needs – for example, avoiding greater protection for minority shareholders provided by cumulative voting and other measures under California law. Delaware courts also enjoy the reputation of being more adept at handling corporate disputes.
Generally a “foreign” corporation is entitled to apply the laws of its home state to governing its internal affairs, but in some situations – for example, where substantial voting stock is owned by California residents and its business is conducted in California – this right can be overcome by California Corporations Code § 2115. Thus, even a Delaware corporation may be subject to pro-shareholder California laws, depending on factors particular to its business.
The type of business entity and jurisdiction where it is formed also may be influenced by the needs or expectations of third parties. For example, Silicon Valley venture capital firms are widely known to favour investing in technology startups formed as Delaware corporations. To make an informed decision, clients therefore are encouraged to engage local contacts and resources for networking and professional advice at the earliest stages.
Also, if the new business will use local workers, it is important to plan and lay critical groundwork before they start. Cultural norms and complex employment laws vary substantially between Britain and America. This topic will be addressed in the next edition of Insight.