Most of our clients are interested in entering into business in America, hoping to try their skill and luck by competing in the largest and most open market in the world. Most are also confused by the myriad state and federal regulations and the seemingly chaotic legal system that results in massive litigation being filed constantly and seems to require written contracts for even the most simple transactions. To people used to a business climate where a hand shake is all that is needed to confirm a transaction, the American system seems absurdly complex, formalistic, and hostile.
But if that was truly the case, the United States would not be the economic giant that it is. The American system works precisely because it is not chaotic. The rules are different than in the rest of the world, but are fully predictable and easily integrated into a business context. With the right planning, it is easier to do business in the United States than anywhere else in the world.
Structure of Business Entities
As in much of the world, most businesses in the United States are formally organized into legal entities that engage in particular businesses. Most businesses are either sole proprietorship (owned by one person), general partnerships (two or more people engaged in business under a written or oral agreement), or, more commonly, the entities which allow for limited liability, namely corporations, limited liability companies, or limitedpartnerships. All the types of entities described above are easily formed and easily run, and the choice of which to use depends on the risk an owner wants to take, tax considerations, and how many people will be involved in the ownership.
Most entities can be created in a matter of days and the creation normally involves filing certain documents with the taxing and government authorities, executing either an agreement or creation documents, and learning the mechanics of managing the structure.
The most important factor is usually whether the entity has limited liability. What this means is whether a debt or legal judgement against the entity can be applied against the individual owners. In the case of sole proprietorship and general partnerships, a judgement against the entity is the same as a judgement against the individuals owning it and each individual is fully liable for all debts of the entity. In the case of corporations, limited liability companies and limited partnerships, this is not the case: a judgement against the entity should have no direct effect on the individual assets of the owners so long as they did not execute personal guarantees or violate the rules for running the entity.
The ability to limit your exposure and not "risk everything" in the business is a crucial advantage to selecting an entity with limited liability and we normally recommend that businesses commenced in the United States be corporations or limited liability companies.
Litigation and the United States Judicial System
The United States is justly famous for two central aspects of its business life: first, a vibrant and free economy that allows most people to engage in an open and fully developed economic life; and, second, a legal system which is extensive, expensive and subject to trial by jury with potential punitive damages being assessed against the defendant.
In the United States, any person has a right to commence litigation against any other person and being sued is a common experience for the person engaged in business, whether domestic or foreign. If you engage in business on a regular basis within the United States, or if the wrong complained of is alleged to have occurred in the United States, you are subject to jurisdiction of the United States Courts.
Unlike much of the world, the party that wins in the United States normally does NOT receive attorneys fees and costs incurred from the losing party. This means, of course, that litigation is much more likely to occur since even a party with even a weak case can risk filing suit without risking paying all the attorneys fees of both sides.
Further, if a party is accused of unethical or fraudulent activity, even in a business context, the other party is allowed to seek "punitive damages" which are levied against a defendant to punish them for such wrongful conduct. Punitive damages are not based on the amount in dispute, but on the jury’s opinion of how much would "hurt" the defendant enough so that they will no longer engage in such activity. Thus, a one hundred thousand dollar judgement for fraud could easily have a five million dollar punitive damage levied. This firm has achieved such verdicts in the past and it is not that uncommon.
No other jurisdiction in the world allows such damages and it should be recalled that it is a jury (a panel of average citizens required to appear and judge the matter by majority vote) that will determine if punitive damages are appropriate in most cases.
Protection Against Legal Risks: the Four Steps
It is the combination of the attractive business market combined with the danger of expensive litigation that creates the dilemma faced by many potential business owners. The rewards appear great but the risks seem remarkable. However, it is relatively easy to create a system of structures and practices that minimizes the risks without interfering with the ability to do business. One simply must carefully plan how to commence business in this particular market.
We feel that there are four basic steps to maximize your protection:
The first step is to create an entity that has limited liability and to adhere to the rules that maintain such limited liability.
The second step is to obtain good liability insurance and to carefully shop the various insurance policies available.
The third step is to utilize a series of form contracts (written documents executed by all interested parties) that radically alter the litigation forum and dangers one faces. For instance, one can provide in the contract that the losing party pays the attorney fees of the winning party. Further, one can eliminate the danger of a jury trial by providing that arbitration (a private trial which is enforceable in a court of law) will be used to resolve disputes rather than litigation in the American courts. One can even contractually ban punitive damages.
Lastly, one creates a "team" of professionals comprised of attorneys, certified public accountants and bankers, to provide resources and advice and one consults with them before any significant move is undertaken.
The four step method of commencing business in the United Stated radically alters the cost benefit analysis and should be undertaken by anyone seeking to enter the United States as a business.
One reason the United States dominates the world economy is that instead of governmental directives created to control the economic market it uses a "market approach" to control by allowing the participants free access to the Courts. By means of judgements obtained against each other rather than governmental decree, the system maintains its relatively open and ethical ethos. Thus the car companies who secretly ignore product defects face massive punitive damages. Thus the cigarette companies who hide the results of their health studies and lie about the effects of smoking now face billions of dollars in punitive damages.
Whether one likes the system or not, if one is to do business in the United States one must master the system and use the numerous tools available to minimize the risk and maximize the benefit. One business person put it well: the only real first class citizens in the United States are the corporations.
The most important lesson to remember is this: if you prepare for the risks ahead of time, the cost of preparation is a fraction of the cost of not being prepared. To seek to enjoy doing business in the United States while ignoring the needs for legal and contractual protection is to expose oneself to the vicissitudes of the market and be subject to the vagaries of the jury system of law. In that light, creating the right structure is a necessity, not a luxury.