Company Formation USA

 In Corporations

We observe frequently that businesses “test” the U.S. market first without forming a legal entity in the U.S.

What is wrong with that approach?

One of the main concerns in the United States is the risk of liability exposure for the foreign company.  This exposure to litigation in the U.S. is a high risk factor and can cause excessive monetary damage to the business. Therefore, forming the appropriate legal entity and creating a legal structure from the beginning is of paramount importance.  The choice of entity (e.g. Corporation or LLC) must be analyzed prior and individually for each client according to their needs. Besides the legal aspect, customers in the U.S. prefer to contract with a U.S. company and issue payments in U.S. currency.

We always point out to our clients that the company formation itself must be carefully planned. We often experience clients prepare corporate documents without legal assistance. The required formation documents are often incomplete. For instance, shareholders have not drawn up bylaws and no shareholder agreements are in place. Additionally, companies often do not comply with local and state law or do not obtain the necessary business licenses to begin operations. Non-compliance may effect the limited liability shield of the company and impose heavy government penalties. This might seem complicated but it is not if the foreign company seeks prior legal advice from professionals here in the United States.

Companies must also be aware that setting up a legal entity alone is not sufficient. Once that is completed, the company must continue to comply with local, state and federal laws and corporate compliance requirements. Sometimes companies neglect to submit annual reports, which initially leads to a penalty and then to the administrative dissolution of the company. Additionally, it is important the company obtains at least general liability insurance and product liability insurance. A liability risk exists from the moment products are being sold in the United States.

Find out more about the common errors German companies make when entering the US market.

This article is for informational purposes only and is no legal advice. Please contact us if you need legal advice.

 

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