If one were to listen to a group of experts on this issue, such as managers who have already successfully established a U.S. subsidiary (see Appendix “Experience Report”), McKinsey, Roland Berger, etc., the question of whether to form an entity or not would unanimously be answered with “yes”. We share this view without restrictions. In addition to the low cost of starting up a business, the following considerations form the main arguments:
- Sales Benefits
- Americans want to have a local contact and avoid calling Germany with its six—or more—hour time difference. They also see the founding of a company as a commitment to the U.S. market with services, warehouse, etc. It is statistically proven that distribution without a U.S. subsidiary does not fully exploit the existing sales potential.
- Liability protection
- Only a company with limited liability should be taken into consideration because it protects the assets of the parent company. There are about 5 types of companies that realistically come into consideration. Out of all the aspects of company formation in the USA, the choice of legal entity is the most important. To take advantage of limited liability, business operations must be carried out contractually by the new U.S. subsidiary after its formation. Delivery of the goods themselves can still be done from Europe.
- Tax relief
- Inter-company agreements in conjunction with the German-American tax treaties allow for optimizing the taxation of its U.S. subsidiary, a significant issue. If the German parent company receives a share of 80% or more after its foundation, there is no withholding tax on the repatriation of dividends (otherwise it is 5%). Therefore, the above-mentioned choice of legal entity also has a significant impact in this respect. A partnership like the LLP, for example, is taxed differently than a corporation (Corporation, Inc). If no company is formed you also inevitably encounter the problem of American taxation of the German parent company: U.S. sales without company foundation means that the German headquarters is liable for tax in the U.S. if it turns out that a Branch Office exists with increasing business activity. This scenario should by all means be avoided.
In the event of insolvency, only the corporation is liable, as in the case of the German GmbH, and not the shareholders with their assets. Although the possibility of liability of the parent company (“piercing the corporate veil”) must be considered, this can be limited by various elements. Otherwise, a corporation protects the private assets of the shareholders.
- Operational aspects
- Credit cards, local insurance, bank accounts, cars, and rentals of offices and warehouses are not possible without a local company. On the other hand, they are essential for day-to-day business. Moreover, it is almost impossible to apply for a visa without company formation in the USA because the new U.S. subsidiary—not the employees—is sponsoring the visa. This aspect is relevant in practice because most companies decide after the foundation of the company to send staff from Europe, who then require a work permit.
- Costs & Timing
- With the exception of the costs of founding a company, which are extremely low compared to Germany, there are actually no arguments against such a step: the foundation is cheaper and can be carried out without any share capital. With the appropriate support of the owner, the foundation of a company can be completed in about 2 weeks, in urgent cases even faster.
- Against the background of the wish for entrepreneurial freedom that is so important for Americans, it is normally possible to found a company anonymously within the USA, i.e. no obligation to appear by name as the founder of a company, as a member of the supervisory board (director) or as the owner (shareholder).
In addition, one person is sufficient for functions in the management board, the supervisory board or as a shareholder, i.e. as a rule – depending on the state – even complex companies can be founded by only one person.
- Business activities of the US company in Europe
- Any US company can also operate with full legal capacity in Europe (see also the German-American Friendship Agreement of 1954, whereby US companies are recognised in Germany as having full legal capacity).
- Forms of enterprise in the USA
- There are different types of companies to choose from when establishing a company within the United States of America, all of them offer different requirements, advantages and disadvantages. The choice of the optimal company structure in the USA always depends on the specific requirements and objectives.
Important preliminary remark: Since there is no uniform company law within the USA, but it is rather determined at state level, the specific legal regulations can vary from state to state, even though most states have now standardized their laws in this regard.
- The Corporation in the USA
- The corporation is one of the most popular forms of company in the USA and can be compared to a certain extent to a German stock corporation (AG). Theoretically, a corporation can be founded in any US state, but due to the differences mentioned above, certain states are particularly suitable for founding a company. These include in particular the states of Florida and Delaware.
For example, it is possible to found the company in the USA by a single person, mostly anonymously and without founding capital. Other states within the USA offer much worse conditions for setting up a company, which makes it worthwhile, even if the main business activity takes place in another state, to set up the company in Florida first and then qualify in a different state.
- The advantages of a corporation
- Just as with the formation of a German stock corporation, the liability of a corporation is also limited in the USA – but to a much greater extent: For example, legal liability, for example in case of claims for damages within the USA, is almost completely limited to the company capital, whereas the private assets of the company founder are extremely well protected in comparison with Europe.
Furthermore, share capital is not necessarily required at the time of foundation, for example when founding a corporation in Florida, whereas a capital contribution of at least EUR 25,000 is required for the foundation of a GmbH in Germany.
In addition, it is even possible to found such a company as an individual within the USA, where no further corporate structures abroad such as a parent company are required. In addition, it is also possible in certain states of the USA to make the process of founding a corporation to a certain extent anonymously (for example, in Delaware).
The corporate bodies of the Corporation in the USA
A corporation has three governing bodies within its corporate structure:
- Executive Officer
- Board of Directors
- shareholder meeting
1. Executive Officer
A corporation may have one or more Executive Officer(s). These are elected by the Board of Directors and, with few exceptions, are responsible for the management of the company. They are allowed to make all relevant decisions in “day-to-day business” and require the approval of the Board of Directors and the shareholders only for serious corporate decisions, such as a merger with another company.
2. Board of Directors
The “Board of Directors” elects and controls the Executive Officers and is involved in the decision-making process in the case of serious corporate decisions. The members of the Board of Directors, who are elected by the shareholders, may also be Executive Officers.
3. Shareholder Meeting
Similar to a German stock corporation, shareholder meetings are used to vote on important corporate decisions. Each shareholder has one vote, and the number of annual shareholders’ meetings to be held varies from state to state.
Depending on the state in which the company was founded, all three corporations may also be represented by only one person (sole proprietor).
Business activities outside the USA
A special feature of the formation of a corporation is that it is set up exclusively outside the USA, i.e. the company is not active in the USA itself. In such a case, special tax regulations often apply, which again considerably reduce the tax burden for the founded company. Furthermore, in this case the obligation to keep accounts and balance sheets can be omitted.
However, in order for a corporation founded in the USA to be recognized as having full legal capacity in Germany, certain requirements must be met in Germany:
In addition to an American business address and an official contact person for the US authorities within the USA (Registered Agent), the corporation, just like a German stock corporation, must file a complete annual report with the German authorities at the end of each fiscal year and must be reported to the responsible trade office once at the beginning, whereby in most cases an entry in the commercial register is also required. This in turn requires an “Apostille” (officially certified) copy of the certificate of incorporation for presentation in Germany.