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Taking Your Business to the U.S.
13 January 2014
Trade Marks, Contracts, Business Entity, Product Liability, Tax
1. Trade Marks
Make sure you protect your trade marks and other IP (patents, copyright, IP licenses and trade secrets) in the United States market. Trade marks are the driving force of many business transactions and IP assets can be used to support outside financing.
“Many companies count intellectual property as among their most valuable assets”
A trade mark registration in Australia will NOT protect your trade mark in the United States. To protect your trade mark in the United States you will need to:
Confirm your trade mark does not infringe anyone else’s in the United States. Arrange for your lawyer to conduct a search of the Federal and State Trademark Registers, Company Name Register and conduct a common law search BEFORE you start using your brand in the United States.
Register your trade mark with the United States Patent and Trademark Office so that you can be assured of the exclusive, uninterrupted use your brand in the United States.
Many companies won’t be prepared to do business with you until you have completed these steps because of the risk of a trade mark infringement lawsuit. Accordingly, protecting your IP is one of the first steps you need to take when considering doing business in the United States.
Because of international treaties, there are different options to protect your IP in the United States. Discuss with your lawyer which option is right for you.
When doing business in the United States, it is important to have well-drafted, first-rate U.S. contracts. A well-drafted contract is your best insurance policy and first line of defense in a county renowned for its proclivity to litigate. Your contract can optimize your chances of getting paid, protect your IP and limit your legal and tax liability.
“A well-drafted contract is your best insurance policy and first line of defense in a county renowned for its proclivity to litigate”
It’s always best to take the initiative in drafting a contract to give you the most favorable terms. A good first step is to have your lawyer draft a Non-Binding Summary of Key Terms “NB-SOT” which can be used as a starting point for negotiations and set the tone of future contracts. Also, have your contracts reviewed by a U.S. qualified lawyer – the terms and conditions used in your Australian contracts may not be sufficient to address the issues and pitfalls of U.S. commercial arrangements.
- Decide what you need (a Distributor? Agent? or Employee?) and do your due diligence before contracting with a third party.
- Consider whether the arrangement should be exclusive or non-exclusive, what areas of the U.S. market should be covered and minimum quotas.
Distributors in the United States often want exclusive distribution rights and full control over pricing, servicing and marketing. However, an exclusive distribution agreement should contain strict performance guidelines.
The U.S. market is highly segmented and it pays to make sure your distributor really can service the areas covered by the agreement.
Be careful your contract terms do not breach antitrust laws. For example, a manufacturer cannot set the prices at which the distributor re-sells its products. Although, the manufacturer may “suggest” re-sale prices.
- Be mindful that your contract terms don’t unintentionally subject you to U.S. taxes. A good practice to limit the likelihood of being subject to U.S. income tax is to make sure all contracts are sent back to Australia to be executed.
- Be careful to include protection of your IP and necessary controls over licensing in your contracts. The United States is a “use”-based trademark system, meaning that without the right controls in place, use of your brand by your distributor or agent, may give your distributor or agent rights to your trade marks!
- While employment contracts are not necessary, they are often useful for key personnel. Employment contracts are governed by both regulation and custom and can help you keep control of your U.S. employees when you can’t be there. Employment contracts can also contain valuable non-compete clauses, provisions to deal with inventions and clauses to preserve IP.
3. Business Entity
An important initial choice is the form of business entity through which to conduct your U.S. operations.
“The form of business entity you choose in the United States is important because it impacts your taxes, exposure to liability and method of control”
There are advantages and disadvantages to the different forms a business entity may take. However, the majority of non-U.S. businesses choose to form a corporation because:
- It provides protection for its owners against liabilities incurred in the business.
- It is usually a convenient vehicle to obtain outside financing.
- It takes only a short time to set up and is relatively inexpensive to create.
- In most States, there is no residency requirement for owners or directors.
A corporation is organized under the laws of a particular State. Most companies are incorporated in the State of Delaware to take advantage of particular features of Delaware State law.
However, a corporation will only provide limited liability if it is properly operated as an independent subsidiary. If the foreign parent company controls the U.S. subsidiary or the parent and subsidiary are so inter-mingled that they effectively operate as a single entity, it may jeopardize the limited liability of the subsidiary. To maintain the limited liability status of a corporation, it is important that the U.S. subsidiary has sufficient capital and lines of credit, that the management of the U.S. subsidiary by the foreign company is through the directors or U.S. executive staff and financial operations are conducted at arm’s length.
4. Product liability
The United States is infamous for its big damage payouts in product liability lawsuits arising out of negligence, breach of warranty or manufacturing or design defects. Because the U.S. has adopted a strict liability policy, your defenses against product liability lawsuits are limited.
“There are steps you can take to limit your risk of being the subject of a product liability lawsuit”
Obtaining product liability insurance, and ensuring your U.S. partners also have appropriate product liability insurance, is your first assurance. However, there are steps you can take to limit your risk of being the subject of a product liability lawsuit:
Meet all regulatory standards. Federal, State and Municipal governments have regulatory requirements. Make sure your product can be lawfully imported into the United States. Do you have all required licenses and permits? Is your product advertised in accordance with relevant regulations?
Use clear and concise warnings and labels. Is your product labeled according to regulation? Have you adequately provided the customer with instruction manuals? Be careful that “bragging” about the performance capability of your product doesn’t amount to an express warranty!
Monitor the manufacturing, distribution and sales process for quality control.
Your contracts can contain terms to limit your liability (such as limiting damages for late delivery and using warranty and arbitration clauses).
Develop effective company policies to deal with claims, implement quality assurance programs and educate staff.
Preserve records and avoid careless communications.
Remember your web site activities can also subject you to jurisdiction in U.S. courts.
If you do find yourself threatened with a lawsuit, contact your lawyer before you say or do anything. It can take several months to correctly serve a lawsuit on a foreign company and determine the correct location of the court that will hear proceedings, and you do not wish to take any actions that would jeopardize this advantage.
U.S. tax laws are complex with many detailed and technical regulations. In addition to Federal taxation each State has its own tax regime. Taxes include income tax (both personal and corporate), sales tax, customs duties and import tariffs, excise taxes, capital gains tax, accumulated earnings tax and payroll tax – to name a few! However, there are also many tax credits and other incentives for businesses. Because of its complexity, your tax liability needs to be evaluated by a tax specialist.
Nevertheless, there are some important basics that are good to know:
- All U.S. tax residents pay tax on their worldwide income, regardless of where it was earned.
If you incorporate in the United States, you are considered a U.S. tax resident and you must file a tax return, whether or not you have earned any income.
An individual with a “green card” or that has a substantial presence in the United States will be considered a U.S. resident for income tax purposes.
- Non-residents are subject to U.S. tax only on income derived from U.S. sources. What amounts to U.S.-sourced income depends on the level, nature, continuity and regularity of activities in the United States. This analysis can be quite complicated.
“Usually it is advantageous for foreign businesses to avoid U.S. tax residency status”
Australia and the United States have tax treaties to prevent double taxation of income and reduce tax evasion of foreign companies. In most cases, an Australian company must have a permanent establishment in the United States to be subject to U.S. income tax. A permanent establishment can be either an actual physical presence (for example, a store front, factory, warehouse or office) or a dependent agent. There are many different factors that will determine if an agent or employee is a “dependent agent”. For example, the following factors are considered evidence of or contributing to the existence of a “permanent establishment”:
- Setting up a branch office in the United States.
- Your U.S. agent has authority to accept orders from customers.
- Your U.S. agent uses business cards that identify her or him as a manager of your company.
- You pay part of the rent of your U.S. agent’s office.
This article is intended to outline some of the issues that you may need to address with your legal counsel when you commence a business in the United States. It does not go into great depth with the subject matter, but offers useful insights into the basics. It is not legal advice and it is not exhaustive of all laws and issues that may apply to your particular business. Qualified legal counsel should review the details of any transaction or business you undertake in the United States.