Date: Wed, 31 Dec 1997 21:07:04 GMT Server: WebSitePro/1.1h Accept-ranges: bytes Content-type: text/html Last-modified: Tue, 16 Sep 1997 15:11:16 GMT Content-length: 11101 Law Offices of Cyrus D. Mehta

HOW TO DO BUSINESS IN THE UNITED STATES

BY
Jack Goldstein, Esq.
Goldstein & Wallman
233 Broadway
New York, New York 10279
(212) 267-0700

RELATIVE MERITS OF HAVING A BRANCH OFFICE
AS COMPARED TO FORMING A SUBSIDIARY FOR A
COMPANY WISHING TO DO BUSINESS IN THE UNITED STATES

OBJECTIVE
MAXIMIZE PROFITS, SATISFY CUSTOMERS, MINIMIZE LIABILITY

As a general rule, opening a branch office of the Parent Company would unequivocally place the Parent Company within the jurisdiction of the United States courts and the state courts in which the office is located and where business is conducted. Depending upon the nature of the activities in the United States and its various states, it may very well also subject the Parent Company to tax liabilities and responsibilities including but not limited to the filing of returns and the payment of taxes. This obligation would very likely also entail the possibility that the various taxing authorities in the United States would demand access to the Parent Company's books. The Supreme Court of the United States has recently made a determination that businesses would be exempt from State income tax if the only-in-state activity is the solicitation of orders. However it is very likely that would not be the only activity undertaken.

It goes without saying that any subsidiary which was formed, would be subject to the same rules and regulations. However the forming of a subsidiary would insulate the Parent Company from the obligation of filing and paying taxes and would insulate the Parent Company from being subject to the jurisdiction of courts in the United States (except possibly for product liability).

It is apparent that forming a subsidiary corporation even one that is wholly owned by the Parent Company, is more advantageous than opening a branch office for the following reasons:

  1. Having a subsidiary would insulate the Parent Company from liability for the activities of the subsidiary;

  2. Having a subsidiary would prevent the Parent Company from falling within the jurisdiction of the United States courts (except for products liability);

  3. Having a subsidiary would preclude the necessity of having the Parent Company file tax returns and pay taxes (although the subsidiary would have to do that).

Except for any internal reasons that may exist, there is no significant difference between operating a branch office and forming a subsidiary relating to:

  1. Ease of operation.

  2. Regulatory/reporting requirements.

  3. Immigration, and visa formalities.

  4. Time frame for setting up operations.

  5. Costs.

  6. Amount of local taxes.

  7. Repatriation of assets.

INSULATING PARENT COMPANY FROM NECESSITY OF
FILING TAX RETURNS IN THE USA

Profits earned on U.S. operations would be subject to taxes imposed by the various taxing authorities. If a subsidiary were formed the subsidiary would be responsible for filing and paying taxes. If business were conducted by a branch office of the Parent Company, the Parent Company would be responsible for filing and paying taxes which could lead to problems. The basic premise is that the tax authorities have a right to tax only income earned by the taxpayer which arises out of activities in that particular taxing jurisdiction (either the United States or the particular state). HOWEVER the manner in which the tax returns are required to be filed causes difficulties and as a practical manner, it may turn out that the actual amount taxed would be different from the tax that would ordinarily accrue on the amount actually earned in the taxing jurisdiction. The reason for this is that most taxing jurisdictions require a taxpayer which has earnings in the taxing jurisdiction and in other jurisdiction as well, to include on its tax return the total amount of income earned in all jurisdictions. The tax on all of that income is then calculated and then the amount of tax finally payable is determined in multiplying the total tax payable on income throughout the world by a percentage which is arrived at by creating a fraction, the numerator which is the income in the taxing jurisdiction and the denominator of which is total income throughout the world. This is the procedure of most jurisdictions. In theory that would result in taxing only the income in the particular taxing jurisdiction. However it can be seen that each tax return becomes very complicated, it requires the divulgence of information that may or may not be confidential and because of other factors may end with a result different from what is theoretically intended. It also may create disputes as to the manner profits are calculated, not only in the taxing jurisdiction but in other places as well.

ALLOCATION OF INCOME

One of the points of contention between the taxing authorities and companies which are controlled by entities outside of the Taxing Authorities' jurisdiction are disputes between the taxpayer and the taxing authority as to the validity of costs of operation. This dispute could arise whether there were a branch office or subsidiary and does not necessarily enter into the considerations for determining which method to use. However it is useful and desirable to point out at the very beginning, the possibility of such disputes so that proper records and documentation may be kept.

PROCEDURES TO FORM A SUBSIDIARY

It is not likely that you will now be able to determine in what State most of the business will be conducted and therefore as a general rule of thumb my recommendation is to form a corporation in the jurisdiction where the principal office will be located. This statement is made notwithstanding the fact that I am aware that there is a great deal of talk about forming corporations in the State of Delaware. There are certain advantages in forming a corporation in Delaware if there are concerns relating to disputes among shareholders, officers and directors or if there is a likelihood that the corporation will become publicly held. There are also advantages in using the State of Delaware if it is intended to issue a very large number of shares (in the millions) and if it is likely that shareholders will become embroiled in disputes with the management of the corporation. Having a Delaware corporation however is of no advantage regarding activities between the corporation itself and third parties.

If it were determined (as an example) that the home office of the corporation would be New Jersey, then unless there were special circumstances, a New Jersey corporation could be formed. Most of the states (including New Jersey and New York) do not require formal meetings of shareholders and directors and permit that they be held by telephone and furthermore, even that formality may not be necessary if written minutes were prepared and signed by the officers and by all the relevant parties. In any case meetings could be held outside the jurisdiction. There is no nationality or residence requirement for officers and directors. The corporations are at complete liberty to issue shares of stock to individuals and corporations, residents, citizens, aliens or any other group or entity.

Consideration should be given to the possibility of forming a limited liability company although that would probably not fulfill the needs of a foreign company.

TAXES

Tax forms would have to be filed with the state of incorporation and states where business is conducted and with the federal government and under certain circumstances with local authorities.

It is recommended that a competent accountant be employed by the company who would be in a position to assist in filing all of the necessary forms. As a general rule the corporation would have to file quarterly State and Federal tax reports. The corporation would have to withhold certain sums from employees' salaries, forward withheld income taxes and social security taxes and file federal and state withholding reports. Usually those sums which are withheld (and certain contributions to social security taxes) have to be deposited on a monthly basis in a depository authorized by the taxing authority or paid directly to the taxing authorities. Payroll services are available for the purposes. There would be unemployment forms to be filed with the state on a quarterly basis and with the federal government on an annual basis. At the end of the year certain reports must be filed and delivered to employees (W-2) relating to state and federal taxes which have been withheld.

MISCELLANEOUS ITEMS

We would be in a position to help with all corporate matters including the formation of a corporation which would not take more than a week to ten days. If there were a time limit it could be done on an expedited basis. We could also assist in keeping appropriate corporate records to protect against any allegation that the operating company is not truly a separate company.

We could also assist regarding tax questions. A competent certified public accountant should be retained for routine activities and preparation of forms.

We could assist the new entity in its activities and relations with various government agencies, relationship with customers and other business activities.

The new entity should obtain insurance including but not limited to workers' compensation and disability insurance and would be obligated to arrange for unemployment insurance as well. This should be obtained by using an insurance broker who would obtain a combination policy commonly known as a "commercial package". There should be liability insurance.

SUMMARY

It is suggested that a corporation be formed and that the jurisdiction in which to form the corporation should be selected based on the home office of the company. A corporate name should be specified and alternative names provided in the event the first choice is not available. Selection of a competent attorney should be the first step in the process.


Home Page · Firm Profile · Articles · Transcripts from TV Show · Analysis of Cases

Copyright © 1997 Cyrus D. Mehta, Esq. All rights reserved.