Fall 2014 Article
INCORPORATING IN THE UNITED STATES
Our foreign clients feel the need to incorporate a subsidiary in this country for various reasons. First, incorporating a subsidiary in the United States often gives more credibility in dealing with customers, allows better assistance to customers, avoids the additional cost of a distributor and allows to acquire a more direct and in-depth knowledge of the market. Moreover, having a subsidiary in this country could in some cases limit the liability of the parent company and allow a more favorable tax treatment. In substance incorporating a subsidiary is often a necessary step to operate on this market.
Corporations in the United States are a flexible and efficient tool. They are not burdened by excessive formalities, especially if compared with European corporations. A corporation is formed in just a few hours, without the intervention of a notary public, and the control over the substance of the incorporation documents is limited. However, it is necessary to proceed with caution to avoid negative consequences and costly mistakes.
Choice of Entity. The first decision to be made is the choice of entity. Apart from partnerships, which are generally are not an advisable vehicle for a subsidiary, possible entities are corporations and limited liability companies. Corporations are stock companies comparable to a Società per azioni under Italian law, or an Aktien Gesellschaft in Germany, and can be recognized by the suffix "Inc.", "Corp." or, less frequently, "Ltd." in the corporate name. Limited liability companies (LLC's) are often compared with S.r.l.'s in Italy or GmbH in Germany, although the comparison is not always appropriate. Branches are not advisable for various reasons, including the unlimited liability of the shareholder and the direct taxation of the revenues of the parent company in this country.
LLC's. LLC's are a relatively recent entity which was mainly introduced as a tool to manage family businesses or real estate investments in a very informal and flexible manner. An LLC can be managed directly by the members as "member-managers" thus eliminating the various levels of corporate bodies and corporate formalities. The shares (called units or membership interests) are usually not represented by certificates and can be linked to specific initiatives or investments of the company. Each member has a capital account reflecting contributions and withdrawals, which is much more flexible than contributions and distributions on shares. The main advantage of an LLC is, however, its possible tax treatment: LLC's can elect to be treated as "pass-through entities" in which profits are only taxed at the members' level, thus avoiding double taxation at the company's and member's level.
Frequently the choice to form an LLC is made upon request by the minority shareholder, who would derive a clear tax advantage. The foreign shareholder, however, should avoid forming a "pass-through" LLC because it would be required to file tax returns in the United States and would be subject to reporting in the United States. We usually advise against this choice of entity. Sometimes if the client insists in forming a "pass-through entity" we recommend incorporating a sub holding in the United States to control the LLC to avoid tax reporting.
Hence, a corporation is usually the entity of choice when opening a subsidiary in the United States.
State of Incorporation. The second decision to be made when forming a company in this country is where to incorporate. Companies are formed in accordance with state law, and each state has its own legal and administrative structure to manage the formation and the functioning of companies. There is no such thing as a "U.S. corporation".
Under normal circumstances, there is no reason to form a subsidiary in a state other than the state where the main activities of the company will be conducted. The rules governing the functioning of corporations in the various states are relatively consistent and, at least for a wholly-owned subsidiary, the differences are not sufficient to choose a state over another. Moreover, when a company conducts business in a state, unless it was incorporated under the laws of that state it must be qualified to conduct business in that state and pay registration and state taxes. If a company "does business" in many states, it will be required to qualify in each such state.
We are often asked to incorporate companies in Delaware, based on alleged tax advantages. This is not accurate since Delaware's taxation is not more advantageous than other states'. On the contrary, incorporating in Delaware while carrying out business in other states would require qualifying and incurring additional expenses.
Yet, Delaware is the state of choice for many corporations, and a majority of publicly traded companies are incorporated in Delaware. Furthermore, venture capital investors prefer investing in Delaware startups. For a start-up contemplating to receive venture capital financing, incorporating in other states could create serious obstacles to financing.
The main reason is that the Delaware General Corporation Law is the most advanced and flexible body of corporate laws in the nation. Moreover, the Delaware corporations court, the Chancery Court, is highly respected and has developed a sophisticated jurisprudence for corporate disputes which is reliable and expertly decided. However, the differences are not such that a subsidiary would have any considerable advantage if it incorporates in Delaware.
Sometimes clients ask us to incorporate in states which do have some tax advantage. Indeed some states such as Texas, Nevada, Alaska, Florida, South Dakota, Washington and Wyoming, have no state taxes. However incorporating in those states only creates a tax advantage if the company actually operates in such states. If the company operates in other states, it will have to qualify and pay taxes apportioned to state where the revenues are generated. Hence, a company incorporated in Nevada which operates in California, will have to be qualified in California and will be subject to taxes in California in the same manner as any California corporation. 
The Name. Not all corporate names can be used. If another company exists with a name that is confusingly similar then the company can either obtain the consent of such company, or use an alternative name, that can also consist in a "DBA", or "doing business as", to be used only in that state.
It should be noted that using a certain corporate name does not give any rights to that name beyond the mere corporation's name in that state. The name will not be reserved or protected in any other state, nor use in commerce would be protected. To obtain protection as a trademark for use in commerce in the United States the trademark must be registered at the United States Patent and Trademark Office (PTO).
Incorporation Procedure. The incorporation is made by filing the Certificate of Incorporation (called Articles of Incorporation in certain states) with the Secretary of State or similar state agency. The filing can be done by fax and the incorporation can be completed in few hours.
The certificate of incorporation must contain general information, including the person authorized to receive service of process, the authorized shares (i.e., shares that can be issued by the Board of Directors without shareholders resolution or additional filings). In certain states the name of the directors must be indicated in the certificate (Nevada). The purpose of the corporation is also required, but it's extremely generic, and includes "all possible activities which can be carried out by a corporation in the state", the more relevant exceptions being bank and trust activities.
Differently from many European countries, the incorporation documents must not be notarized. Also, the certificate of incorporation can be signed by a third party (the so-called incorporator) who after the incorporation will appoint the board of directors and immediately resign.
Corporate Bodies. The corporate bodies of a corporation are the shareholders (called stockholders in Delaware), the Board of Directors and the officers who manage the company under the supervision of the Board. The required officers are usually the President, the Treasurer and the Secretary. No statutory auditors are required, and there is no requirement that officers or directors be US citizen or reside in the US.
Different rules govern the number of Directors. For example, in Delaware a corporation can always have a sole director, while in California and Massachusetts the board must have at a minimum three members, except where the corporation has one shareholder, in which case it can have a sole director, or has two shareholders, in which case it can have two or more directors (but not less than two).
The first acts of the Board of Directors in the "organizational actions" are the appointment of the officers and the adoption of the bylaws which regulate the life of the company. The bylaws usually can be modified by majority of the directors.
Resolutions of the board can be taken either at a duly-called meeting (which can also be attended by phone) or by unanimous written consent. In most states, the shareholders having a majority can also approve resolutions by written consent, as long as they notify the other minority shareholders of the action taken.
Stock Capital. In the organizational actions the board also approves the issuance of the shares. Certain filings may also be required in accordance with securities regulations. The corporation can have one or more shareholders, who can be either legal entities or individuals. That is no need that the shareholders include US citizens or residents. Usually a subsidiary would issue only shares of Common Stock. Preferred Shares are usually issued to venture capital investors or when specific preferences are desired.
Corporations in the United States do not have a minimum share capital. Consequently the shareholders can determine the capitalization of the company with great flexibility and are not required to reconstitute the share capital if the company suffers losses. Nevertheless it would not be advisable to incorporate a company with a capitalization insufficient to carry out its normal activities because this could indicate that the company is a mere sham. While usually the shareholders are not liable for obligations of the company, if the company is considered a mere sham creditors could "pierce the corporate veil" and sue the shareholders for liabilities of the company. Note that the risk of piercing the corporate veil also exists if there is commingling between the shareholders' accounts and the corporation's accounts and no corporate formalities are respected.
The ratio between debt and equity is not fixed but it should be reasonable to avoid that loans be reclassified as equity. Assets instead of cash can be contributed in consideration for the shares. No special formalities are required from a corporate stand point, but it could be advisable to obtain an appraisal for tax reasons. Past services can also be contributed.
If the company has more than one shareholder, it is advisable to enter into a shareholders agreement. There is no limit to the duration of a shareholders agreement.
Formalities for Maintaining the Corporate Status. The formalities for maintaining a corporation are relatively simple. Filing of an annual or bi-annual information statement with the Secretary of State is required, and failure to do so could cause the company to be suspended and eventually forfeited. The shareholders and the Board should adopt at least annual resolutions, to renew the appointments and approve the annual financial statements. Note, however, that since there is no obligation to file the financial statements with any public agency (other than file tax returns), the failure to approve the financial statements does not by itself create any liability.
Finally, note that while incorporating a company is relatively fast and simple, dissolving a corporation can have much higher costs and require more complicated activities. Consequently it is advisable not to rush and incorporate before a clear plan as to the operations in this country has been developed.
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This article is for information purposes only and does not constitute legal advice. The information contained herein may be outdated or incomplete, and shall in no way be taken as an indication of future results. The transmission of this article is not intended to create, nor does its receipt constitute, an attorney-client relationship between sender and receiver. You should not act on the information contained in this article without first seeking the advice of an attorney.
 LLC's can also taxed as corporations.
 Corporations can also be treated as pass-through entities ("S" corporations) but certain restrictions apply, including that no shareholder can be a foreign subject.
 A company cannot simply move from one state to another. In order to change the state of incorporation, a new entity in the state of destination must be formed, and the existing corporation then will merge into the new entity.
 See Valla & Associates Newsletter on Venture Capital Investments (Winter 2013).
 Future services can be contributed in consideration for LLC membership interests.