Legal Risks & Challenges When Entering the U.S. Market




Moving and establishing your business in the U.S. market might seem like a straightforward process, but the reality is that there are a lot of issues to be aware of and many differences from what it’s like doing business abroad. Having a partner in the U.S. who knows what the market looks like could therefore save you both time and money in the long run.


Erik B. von Zeipel is a Californian lawyer specializing in helping Scandinavian clients in the U.S. In this interview, Erik will highlight some of the main legal issues that you can expect when doing business in the U.S. as well as some of the differences between business in the U.S. versus in Scandinavia.









Background


Erik grew up in Sweden but moved to the U.S. at the age of 19 to he attend undergrad at UCLA where he majored in Business-Economics and minored in Accounting. He went on to attend law school, also at UCLA, and has been working as a lawyer in California since 2002. After working at a large international law firm in Los Angeles for many years, he now provides clients with the same quality services but for a fraction of the cost. For the last 10 to 12 years, he has helped numerous Scandinavian companies with pretty much every aspect of doing business in the U.S, from starting a business to closing a business and everything in between.


“Because of my bi-cultural background, I understand both mindsets. It helps a lot when you know how a client thinks, what they are used to and what is likely to be new to them”, Erik says.

The U.S. is a very different landscape than what Scandinavian companies are used to back home. Erik explains that legal issues often play a much bigger role here, and that it can quickly add up and get very expensive.


“Most U.S. companies, even smaller ones, have their own in-house attorneys working full-time on legal issues. But since attorneys are so expensive, I typically work as an outside general counsel for my clients. It allows the client to save money by not having an attorney on the payroll. Instead, they call me with their issues and I find solutions. I do a significant part of the work myself, but I also draw on expertise from my large network that I have built up over the last two decades working in the profession.”


A typical day of work for Erik includes preparing, reviewing and negotiating contracts between clients and their customers, vendors, employees and independent contractors. He also helps prepare legal policies for employees like handbooks and various agreements.


“Employment law is also very complicated in the U.S. compared to what it’s like in for example Sweden. And in California especially. I spend a good amount of time preparing non-disclosure agreements, employee confidentiality agreements and pretty much any agreement that a business may deal with. Scandinavian clients are often surprised by the size of U.S. contracts. They tend to be much longer and much, much more complicated. It’s very important to understand and negotiate the contracts because they will be used against you. Sometimes, I also help resolve disputes. Scandinavian companies rarely get involved in litigation but it’s hard to avoid in the long term.”



Business Entities


There are many issues a Scandinavian company can expect to face when it decides to enter the U.S. To dig a little bit deeper into the whole process, let’s start from the very beginning.


To start with, it’s not always required, but most companies will set up a new separate company. There are then several different forms of business entities to choose from, each with their own advantages and disadvantages. The right choice depends on the client’s specific needs and expectations, but the three main issues to consider are: (1) limiting liability; (2) taxation; and (3) operational aspects.


The traditional corporate form is a simple corporation. Corporations provide limited liability but have double taxation and require adherence to corporate formalities to both start and operate the business. Corporations are governed by articles of incorporation which are filed with the Secretary of State in the state of incorporation and bylaws that the company adopts as sort of “rules” for how the company will operate.


On the other end of the spectrum, we have partnerships. Partnerships don’t have limited liability, have flow-through taxation (i.e. avoids double taxation), and are very easy to form and operate. In fact, a partnership can be formed without any paperwork or government involvement whatsoever, but it’s preferred to have a written partnership agreement.


Between corporations and partnerships there are several other business forms that have their own pros and cons. A limited liability company, or LLC, is a popular form that provides limited liability, flow-through taxation and is governed by operating agreements entered into between the members of the LLC. Other forms of business entities are S-Corps, Limited Liability Partnerships, Sole Proprietorships and some other less common forms. The right structure for a business depends on what it wants to do and what its goals are. It’s not one size fits all.


A good question many companies have when they choose to come to the U.S. is where they should start their business since all states differ from eachother in many ways. However, it’s long been known that many international companies traditionally incorporate in Delaware. But why is that? Here is what Erik had to say about it.


“Long ago, Delaware established a reputation for being a jurisdiction that was good for businesses. Nevada has been somewhat successful doing the same. A lot of foreign businesses choose to incorporate in Delaware as sort of a “knee-jerk reaction” because they have heard that's “the best.” These days, I think there is much less of a need to pick Delaware. There are a lot of jurisdictions that have “caught up” and now provide most of the same perceived advantages that Delaware did many years ago. It often makes sense to focus on the jurisdiction where your business will be headquartered. You will need to qualify to do business there in any event and being incorporated elsewhere creates additional fees and administrative work that can be avoided if you incorporate in the state where you will be doing most of your business. I often tell clients that if California is good enough for Apple to incorporate in, it’s probably good enough for you."



Insurance Laws, Corporate Formalities and Accounting


Liability is a huge issue in the U.S. and so is insurance. Having all kinds of insurance (like general liability, auto - and health insurance) is crucial. In California, companies are required to have workers compensation insurance to cover workplace injuries. It’s expensive but legally required. Since employee lawsuits are so common, Erik suggests that having EPLI (employment practices liability insurance) is also a good idea.


“There are so many laws in the U.S. that a business has to comply with and that can certainly seem overwhelming for an outsider. Federal laws, state laws, county laws and city laws … and laws that apply to so many different areas. Generally, a business has to register to do business with the Secretary of State in the state where it operates. You will then need to maintain and update that registration from time to time. In addition, you will have to register and obtain various permits from the state and local authorities in order to operate including business licenses from the city or county. Depending on the type of business you’re involved in, you may need to obtain other special licenses or permits. In many states, the employer needs to register with the federal and state government to get a tax-payer ID. You will also likely need to get a seller’s permit. And the laws change from time to time. Many government entities have periodic reporting requirements that you need to keep abreast of as well.”


Corporate formalities is another issue that Erik mentioned is important for companies to be aware of when they try to establish in the U.S. In order to get the liability protection that a separate entity can provide, you need to maintain the separateness of that entity and treat it apart from any other entity (or person) that you want to protect. For a corporation, this means that you manage the corporation in compliance with the articles and bylaws, and that you have regular and annual board- and shareholder meetings as required by your bylaws and state law. It also means that you don’t co-mingle the assets of the business with a parent, subsidiary or with other individuals. In lawsuits, plaintiffs often seek to go after deeper pockets and may seek to sue the parents, directors, owners or employees of a business. Courts look at a number of different factors to determine whether it will uphold the separateness of the business or allow the plaintiff to “pierce the corporate veil” and sue other stakeholders. Therefore, it’s very important to maintain the separateness of legal entities in order to get the benefit of limited liability.


“Lawyers can assist you with all of those things and make sure that you have everything you need to get started with your business in the U.S. Having a good, experienced accountant is also going to be crucial. Your accountant will help you with issues related to taxes and bookkeeping, including your tax filings, and help you make sure that things get handled correctly", Erik says.



Employee Issues


If all of the above weren’t enough to make you feel a bit overwhelmed, Erik cautions that employee issues are also more complicated in the U.S. than in the Scandinavian countries.


“The U.S. is a very litigious society. It’s easy to hire and fire employees but the most common lawsuit that you are likely going to deal with is being sued by an employee. A former employee has little to lose because the plaintiff’s attorneys don’t charge the employee anything to sue the former employer. Instead, they get paid from any settlement or judgment they obtain. The attorneys bank on the fact that it’s expensive to defend yourself even against frivolous lawsuits. Not just in terms of dollars and cents, but in time and energy. Businesses need to understand that lawsuits are a cost of doing business in the U.S. so it’s best to be prepared. Most businesses spend significant amounts of money trying to protect themselves against employment lawsuits. You need to sometimes comply with complicated and changing laws to protect employees. It’s also important to have a strong and experienced human resources person as well as lawyers to take the steps required to protect the business. Unlike in Scandinavia, employees are terminable at will in the U.S. This means that they can be fired for any legal reason without advance notice. On the other hand, it’s a good idea to have standard agreements with your employees that cover arbitration, non-compete and non-solicitation issues, confidentiality and assignment of inventions.”



Final Words


As you can see, there are a lot of issues to deal with and steps to be aware of if your goal is to move and establish your company in the U.S. Doing business in the U.S is a different beast compared to what many Scandinavian companies are used to. There are so many different laws that you need to comply with and the contracts are longer and much more complicated. Picking a business form suitable to your company, having good lawyers, HR professionals, accountants and making sure you are all set on the insurance, registration and permit sides are just a few of the things that are important for you to look into. This is something that’s important to be aware of, but don’t let that scare you away, the process can be very rewarding in the end. Erik agrees.


“If you are thinking of doing business in the U.S., you need to be prepared. There are risks, of course, but the U.S. is a huge market with huge potential. A client recently told me something along the lines of that once you come to the U.S., the rest of the world doesn’t matter. It will not be the same as back home. You need to have assistance on both the legal side and the accounting side. Find partners that you can trust and who speak your language. And by that I don’t mean that they just speak Swedish, or whatever your language may be, but that they understand your unique perspective coming from abroad. I’m here to help.”





Legal disclaimer

The information provided on this website does not, and is not intended to constitute legal advice. All information available on this site is for general informational purposes only. The information may not be the most up-to-date legal information available.


You should contact an attorney to get advice on their particular legal matters, and should not act, or refrain from acting, based on information on this site without seeking legal advice from an attorney in the relevant jurisdiction. Only your own attorney can confirm whether the information, and your interpretation of it, is applicable or appropriate to your particular situation. Your use of, and access to, this website and any resources contained within the site do not create an attorney-client relationship between the reader, user, or browser and website authors, contributors, contributing attorneys, or law firms.


All liability with respect to actions taken, or not taken, based on the information on this site is hereby expressly disclaimed. The information on this website is provided “as is” and no representations are made that the content is error-free.





Author: Bianca Bostrom l February 1, 2022



20 views