Published On: July 19, 2024
Category: Business Formation
The United States (“U.S.”) market is the largest buyer’s market in the world. Therefore, for most German businesses, it is a natural market to expand into. In addition, the low cost of energy and skilled workforce in Colorado and the U.S. make the U.S. a very attractive location for German manufacturers. This article covers the following topics for German companies wishing to do business in the U.S.:
- Choosing the type of entity for your U.S. operations
- Information required to form your U.S. company
- Basic employment issues
Choosing the Right Entity for Your U.S. Operations
Type of Corporate Entity – Corporation or LLC
Generally, a German company’s U.S. subsidiary will take the form of either a corporation (“Inc.” or “Corp.”) or a limited liability company (“LLC”). There are key differences between the two.
Corporation
A corporation is a company where ownership is represented by shares in the corporation, much like an Aktiengesellschaft. A corporation does not have “flow-through” taxation but provides its shareholders with limited liability. In other words, the corporation files its own tax return and pays corporate income taxes on its profits. If a company pays dividends to its shareholders, the shareholders are taxed on those dividends. There is therefore potential for double taxation. Liability for the individual shareholders is limited to their investment in the corporation.
Limited Liability Company (LLC)
In contrast, an LLC has both “flow-through” taxation and limited liability. The owners of an LLC are known as “members,” not shareholders. They hold membership interests in the LLC, not shares of corporate stock. LLCs do not pay federal or state income taxes. All profits and losses of the LLC are passed through to the members, who then report them on their personal tax returns. (The LLC may be required to file an informational return with the IRS.) As with shareholders, LLC members are generally not liable for the LLC’s actions.
While different tax and legal considerations dictate whether a German company should use a corporation or an LLC, generally, German parent companies operating in the U.S. use corporations. Using an LLC means that the German parent company, as the LLC’s owner, must file a U.S. tax return and pay U.S. taxes on the LLC’s income and losses. This means that the German parent company will be required to list foreign source income that is treated as effectively connected to a U.S. trade or business by the Internal Revenue Service (“IRS”).
This and other elements of filing a U.S. tax return may complicate the German company’s tax filings, whereas, in the case of a corporation, the newly created corporation, not the German parent company, would file the U.S. tax return and pay its taxes. Second, by filing a U.S. tax return, the German company is more exposed to the risk of an IRS audit, which has the authority to conduct worldwide investigations. Consult with a U.S. or German tax advisor for more information.
What is a Delaware Corporation?
All corporations must be formed in one of the U.S.’s 50 states. The state in which the entity is incorporated or formed need not be the state where its offices or headquarters will be located. Each of the 50 states has its own statutes (the Corporation Code) that govern corporations. Most states’ Corporation Codes are based on Delaware’s, which was the first state to enact a comprehensive corporation code. Hence, the corporate codes of each state are substantially similar to those of other states. There is no federal law governing corporations.
Advantages of Incorporating in Delaware
Delaware is typically the desired state of incorporation for companies that expect to have their shares registered with the Securities and Exchange Commission and listed for sale to the public on a stock exchange. More than 50% of Fortune 500 companies are incorporated in Delaware. Delaware offers the following advantages:
- Delaware’s general corporation law provides flexibility for management in running a business.
- Delaware state income tax generally is not levied on corporations not doing business in Delaware.
- The Delaware Court of Chancery is arguably the most respected business court in the United States.
- Delaware has a long-established and respected body of corporate law.
However, forming a corporation in Delaware is generally more expensive than forming one in a state such as Colorado. In addition, annual maintenance of the corporation, including maintaining a registered agent in Delaware and paying state fees each year, is generally higher than in other states. We therefore advise German clients to form their wholly-owned U.S. subsidiary companies in the state where they plan to locate their primary place of business in the U.S.
Setting Up the Corporation
There is no minimum capital investment (Stammkapital) requirement at formation, and a corporation may have only one shareholder.
Information Required to Form the Corporation
To form the corporation, we will need to know:
- The name of the U.S. corporation that you want to use;
- Address of your local operation;
- Name and address of a registered agent (we can provide this service);
- Names and addresses of the initial shareholders
- Names and addresses of the initial board of directors
- Names and addresses of the initial officers
- Number of shares to be issued to the initial shareholder.
- Amount of capital that the initial shareholder is investing (this is normally the amount of money required to set up the corporation, including funds to obtain telephone and internet service, hire a manager, pay the legal fees and filing fees required to form the corporation, lease office, warehouse, or industrial space, and similar expenses. Capital can be contributed later as well.
- Identity and social security number of the corporation’s initial officer. It is most convenient when a corporation hires a U.S. citizen with a Social Security number to serve as president, Chief Operating Officer, or in another senior management position. That allows us to use that person’s Social Security number to apply for the corporation’s Employer Identification Number (EIN) from the Internal Revenue Service. The EIN is required before the corporation can open a bank account.
Corporate Governance Structure
Corporations use the following basic governing structure:
Shareholders
The corporation is owned by its shareholders. Each shareholder has one vote for each share of the corporation’s stock he, she, or it owns. Therefore, if a shareholder owns 51% of the shares, that shareholder can elect all of the directors and will control the corporation.
Board Of Directors
The corporation’s bylaws establish the number of directors it must have. There is a statutory requirement that if the corporation has one shareholder, it must have a board of directors consisting of at least one director. If there are two shareholders, two directors are required; if there are three shareholders, three directors are required. If there are more than three shareholders, then the minimum number of directors is three, but the Shareholders may choose to have more than three directors.
The Board of Directors is responsible for appointing corporate officers and establishing the general direction of the business. All significant decisions, such as hiring or firing key management personnel, making large capital expenditures, borrowing money, or entering into a real estate lease or purchase agreement, are normally approved by the Board of Directors.
Officers
The day-to-day operations of the corporation are the responsibility of the corporation’s President, Vice President, Secretary, and Treasurer. Many corporations also have a Chief Executive Officer (CEO), Chief Financial Officer (CFO), Chief Operating Officer (COO), and Chief Technology Officer (CTO). These positions are optional and must be created in the corporation’s bylaws. One person can serve as both the President and the Secretary/Treasurer. The Board of Directors can determine which officer positions the corporation will have.
Only the officers have the authority to enter into contracts that will bind the corporation. Therefore, it is important that the corporation has a president from the date the corporation is registered with the Secretary of State.
Employment Issues in the United States
Employment Contracts
Most non-management employees in the U.S. do not have written employment contracts. Instead, a letter containing the hourly wage to be paid and a brief description of benefits, vacation, sick leave, etc., is common. In many cases, companies require their employees to sign confidentiality agreements to protect the corporation’s trade secrets and other confidential business information.
Wage or Salary
In the U.S., full-time employees typically work 40 hours per week. Employees may work more than 8 hours per day but not more than 40 per week unless they are paid overtime. For employees who work more than 40 hours in a week, standard overtime is the employee’s hourly wage multiplied by 1.5, and work on holidays is compensated at the employee’s hourly wage multiplied by 2.0.
Vacation
Paid vacation is not required by law, but if offered, 2 weeks (10 days) per year is common. Some companies offer 3 weeks (15 days) of paid time off per year to long-serving employees. Three weeks or more of paid vacation is less common.
Holidays
There are six official holidays each year, including New Year’s Day, Memorial Day (the Last Monday in May), Independence Day (the 4th of July), Labor Day (the First Monday in September), Thanksgiving Day, and Christmas Day. Other optional days are Martin Luther King Day, Presidents Day, the day after Thanksgiving, and Christmas Eve.
Sick Leave
Like vacation time, paid time off for an employee’s illness is not required, as a general rule, by state law. For companies that offer time off for illness, it is common to grant employees 5 paid days off per year. There is a trend to combine sick days and vacation days into a single category called Personal Time Off (PTO) to make accounting for time off easier.
Health Insurance
Small businesses (companies with fewer than 50 full-time employees) are not required by law to provide employees with health insurance, but many small companies still offer it to attract the best workers. If a corporation chooses to offer health insurance, all corporate employees must be offered the same benefits. Insurance is normally offered to cover only the employee, but the employee is often given the option to purchase family coverage.
Also, the employee normally pays a percentage of the health insurance cost (up to 50% is common), but again, this is not required by law. It is up to the employer. In addition to health insurance, dental, vision, life, and disability insurance are commonly offered.
Wages
Wages are generally paid monthly, twice each month, or weekly, and no “13th Month” wage is paid. The employer is responsible for withholding taxes from wages. Payment via bank transfer (direct deposit) is becoming more common, but payment by check remains the most common practice for small businesses.
Eligibility
Each corporation must verify all employees’ eligibility to work in the U.S. and file an I-9 form for each.
Salary versus Hourly
All employees who earn less than $47,476 per year (effective as of December 1, 2016) must be paid on an hourly basis and are entitled to be paid overtime if they work more than 40 hours in a week. Many employers do not want to track an employee’s hours and prefer to pay the employee a flat weekly salary. The problem is that the employee often works more than 40 hours per week and then claims overtime pay at a later date.
Since the corporation has no records of the employee’s actual hours, the corporation normally cannot prove that the employee did not work the overtime claimed. The Department of Labor will then require the corporation to pay the employee overtime plus interest and to pay the government a penalty.
Independent Contractors
U.S. laws defining who qualifies as an independent contractor are similar to those in Germany. Many employers hope to avoid withholding taxes from a worker’s wages and avoid paying the employer’s share of state and federal taxes, Social Security, Medicare, Worker’s Compensation Insurance, and Unemployment Compensation contributions for those workers.
There are tests used by the State and Federal taxing authorities to determine whether a worker is actually an independent contractor or an employee. Many employers have misclassified employees as independent contractors and are now being sued by tax authorities for unpaid taxes, interest, and penalties. We therefore urge you to consult us regarding the classification of workers as independent contractors.
Expand into the U.S. with Confidence
Entering the U.S. market presents a tremendous opportunity, but it also requires careful planning, proper entity formation, and compliance with complex tax and employment laws. Lantz Law Group assists German companies with every stage of establishing and operating a U.S. subsidiary, from selecting the right corporate structure to navigating governance and employment requirements.
If you are considering expanding your business into the United States, contact us to discuss how we can help you build a strong and compliant foundation for your U.S. operations.