Coming to the US to do business: overcoming legal and cultural challenges
April 2015 | EXPERT BRIEFING | BOARDROOM INTELLIGENCE
Companies from across the world, both small and large, have decided to enter the US market of late. Their decision is predicated on a variety of strategic considerations.
Credentials. No matter how successful a company might be in its own geographic area, or even in a variety of international markets, showing traction and success in the US market demonstrates a level of sophistication and maturity that is valued by customers, partners and employees alike. The US market is very sophisticated and highly competitive, and if a company can succeed here, it can succeed anywhere.
Management and marketing. American companies are known for superior management and marketing skills. While excellent research and development capabilities, customer support and logistics are available all over the world, American management, sales and marketing expertise remain highly valued. This expertise can be best harnessed through a US entity, which offers familiarity and important tax and financial advantages to US employees.
Access to capital. US venture capital still remains a critical source of funding for enterprises of all sizes and stages. While American VCs are prepared to invest all over the world, many find it easier and less risky to invest in a US entity. Given the other risks posed by high growth companies, a US presence offers to de-risk at least one aspect of the investment decision.
Partners. Many international companies find it easier to establish alliances with US based businesses. This is due, in large part, to the predictability of US laws and corporate governance requirements.
Transparency and business ethics. Despite some recent much publicised instances of securities and financial misdeeds on the part of some US companies, the general reputation of American corporations remains highly positive – and deservedly so. Financial and management transparency, compliance with legal and ethical standards, and an overall culture of ethical business dealings constitute key pillars of the success of the US economy. Non-US companies often seek to understand and benefit from this culture through the establishment of US operations.
What you need in the US
In order to be successful, non-US companies must consider a series of interrelated legal and cultural factors in order to establish a successful US presence. These include the following:
Tax structure. The interrelationship between the system of taxation in the home jurisdiction and the US (both at the federal and state levels) requiressophisticated and coordinated analysis and strategic planning between the tax professionals of both the company’s home country and the US. Depending on the size of the company, its revenues and type of operations, and also involving considerations of other jurisdictions where the company already does business, or is planning to do so in the future, proper tax planning will result in minimising the overall tax expenditure of the business, and enables the business to deploy its financial resources in the most efficient manner. Often, tax planning is not a black and white decision, but rather a balancing of interrelated short and long term business practices and strategies. Moreover, tax planning cannot be left to tax lawyers and accountants alone. It must be undertaken in a comprehensive manner that involves financial, marketing and operational executives, business, intellectual property and employment lawyers, economists and other professionals.
The benefit of sophisticated – if not byzantine – structures must be weighed against the cost of compliance. What may work for Apple could be highly inefficient for a company with total revenues below $100m.
Contacts. When the chief executive of a company considers the depth of his or her domestic contacts, together with the contacts of all other members of the management team, the value of those contacts becomes obvious. Key executive recruiting, the establishment of important vendor and partner relationships, marketing and sales opportunities, among others, relies heavily on personal contacts. Of course, what counts is not merely the number of contacts, but their quality, built over decades of experiences and interactions, through which a high level of personal knowledge and trust is developed.
The importance of contacts when entering the US market is equally obvious. Yet many foreign businesses fail to appreciate the significance of the network of connections required to successfully penetrate a new market. Here, the critical importance of finding the right individuals – individuals who have the same rich, reliable and trustworthy contacts as the top managers in the home office – cannot be over-emphasised. Cultural differences in this area play a subtle, but important, part. US managers develop valuable connections through their college and graduate school networks and through a series of philanthropic and sports activities that expose them to peers in diverse, but often connected, industries. Philanthropy and public service are also key components of American culture, especially among high level executives and their spouses; they serve as an important networking tool that binds together high level executives who share a common interest in music, education, housing or medical innovation.
Logistics. The US market is relatively easy to navigate. Nonetheless, simple steps, such as obtaining an Employer Identification Number, setting up a bank account, or finding the right location for operations, require a deep and sophisticated understanding of the local market. Here again, legal, business and cultural considerations play an important role. It may seem relatively straightforward to set up a payroll program using a web-based service provider, or establish business operations in a lower cost area of a large city. However, both of these may be very poor choices. The web-based service provider may not be aware of the unique tax, withholding, unemployment and workers’ compensation requirements of the local jurisdiction where the company plans to establishits US base of operations. The geographic location that the business might choose could be inconvenient to the key personnel that the business seeks to recruit – whether due to the absence of convenient mass transit or the lack of a peer group valued by the particular employee pool.
Immigration. US immigration laws dealing with non-US personnel are highly complex. Using the wrong immigration attorney – such as someone only familiar with immigration laws involving non-business cases – could be highly detrimental. Saving money by filling out immigration forms without legal assistance could be even worse. Once the wrong steps are taken, remedial efforts will be much less likely to be successful, and will definitely cost far more in time and legal fees.
Employment and human relations. Recruiting US personnel for a non-US company’s American operations is a critical requirement for success. US employees are quite sophisticated and highly sought after by many companies. A US business must understand the local HR market for stock options and other equity compensation plans, health insurance benefits, retirement plans, severance expectations, and so on. Generally, all of these requirements are significantly different from those encountered in the corporation’s domestic market, or even in other foreign countries. Providing an attractive and competitive compensation package requires the collaboration of a number of US professionals who are thoroughly familiar with the specific market and offer a balanced package that is neither inadequate to attract key employees nor too rich for the particular business.
Cultural and business perspectives. Many lawyers and other professionals in the US may well be experts in their field. Yet, they may be unaware – and are often uninterested – of the cultural and business subtleties that must be mastered by their non-US clients who are seeking to establish a US presence. Knowledgeable advisers can help a foreign company not only by finding suitable real estate agents, head hunters and accountants, but also by offering ideas about the appropriate neighbourhoods where the foreign executive in charge of establishing US operations should live, where the most suitable schools for their children are located, and even what car and what kind of clothing is appropriate for their position. Quite often, the lack of understanding of these subtle differences, and the absence of friends or advisers who can offer suggestions, can mean the difference between success and failure for the business itself.
Many legal professionals start their discussions with foreign clients by describing the intricate tax structures – the flips and offshore IP subsidiaries – which are required in order to build a successful US presence. While these are undoubtedly critical factors, in our view they must be incorporated into an overall strategic plan that addresses each of the areas mentioned above. Only by understanding and integrating the diversity of considerations that a foreign company must evaluate, using savvy and well ‘plugged-in’ professionals working together as a team, can a foreign firm expect to create a successful US business.
Gabor Garai is a partner and chair of the Private Equity and Venture Practice at Foley & Lardner LLP. He can be contacted on +1 (617) 342 4002 or by email: email@example.com.
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