The rapid evolution of the digital economy has exerted a profound impact on international business. One trend that’s increasingly coming into focus is the growing interest among Japanese companies in establishing corporations, branches, and regional headquarters in the United States. This cross-cultural business venture, however, requires careful navigation of both legal and cultural landscapes.
Japanese firms are drawn to the US for its robust economy, large consumer base, and innovative spirit. Yet, establishing a corporation in the US presents peculiar regulations and multiple state jurisdictions that these companies must consider. Not only must they comply with complex US tax rules, but they also need to adapt their business practices to align with the American corporate culture and regulations, particularly if they operate in or incorporate Web3 technologies. The rise of blockchain applications, decentralized finance (DeFi), and the metaverse has given rise to new considerations, requiring a nuanced understanding of both US and international law.
In this blog, we’ll delve deeper into these considerations, offering practical advice for Japanese companies looking to establish a foothold in the US market.
The first fundamental consideration is the choice of the business entity. This decision will significantly influence the company’s operational structure, tax obligations, and legal responsibilities. The most commonly selected entities are the C-corporation and limited liability company (LLC), each with its own advantages and implications.
A C-corporation, akin to a stock corporation in Japan, is an independent legal entity that can issue ownership shares to raise funds. It shields its shareholders from personal liability for corporate debts or liabilities. However, they are subject to double taxation: the corporation itself pays taxes on its profits, and then shareholders also pay taxes on the dividends they receive.
On the other hand, an LLC is similar to a limited liability company in Japan, in that it offers more options in terms of management and profit distribution. It escapes double taxation. The company itself does not pay taxes on its profits. Instead, the profits pass through the organization to the owners, who then report them on their individual tax returns. These significant tax advantages notwithstanding, the choice in business structure is not straightforward for Japanese companies because their US subsidiaries would be considered foreign corporations under Japanese law, and therefore not eligible for profit-and-loss aggregation. This means Japanese parent companies cannot benefit from pass-through taxation.
Given these considerations, Japanese companies often opt for C-corporation status when expanding into the US. They may consider double taxation a fair price to pay for the familiarity of a structure that aligns more closely with Japanese regulations.
Selecting a Jurisdiction
Typically, the state of incorporation is either the state where the business activities are physically conducted or a different state known for its favorable corporate laws. For instance, Delaware is a popular choice among both domestic and international businesses due to its straightforward incorporation procedure and predictable legal environment.
Delaware’s Court of Chancery, which specializes in corporate matters, has a long history of precedent-setting decisions. This makes it easier for companies to anticipate the outcome of potential corporate lawsuits, providing a layer of predictability and security. Furthermore, Delaware’s corporate law is well-established and provides for a business-friendly legal environment.
However, it’s important to note that if a corporation chooses to incorporate in a state other than where its physical operations take place – say, incorporating in Delaware but operating in several other states – it must also register as a ‘foreign corporation’ in the state of operation.
Registering as a foreign corporation involves additional paperwork and fees, and the company must comply with the laws of both states. For example, a corporation incorporated in Delaware but doing business in California must adhere to Delaware law for corporate governance issues and California law for its operations in California.
The decision of where to incorporate in the US requires careful consideration of various factors, including the nature of the business, the predictability of legal outcomes, tax implications, and the administrative requirements of different states. Companies should seek professional advice to navigate these complexities and ensure they make a decision that aligns with their strategic objectives and operational needs. The right choice of state for incorporation can provide a solid foundation for a company’s successful expansion into the US market.
The US has a complex system of federal, state, and local licensing requirements. Businesses often must comply with licensing requirements at multiple levels of government. These requirements vary significantly depending on the nature of the business and its state of incorporation.
Certain types of businesses, such as those involving broadcast media, aviation, interstate transportation, or the sale of alcoholic beverages, firearms, and wildlife require federal permits.
At the state level, most businesses need a general business license to operate. In addition, certain professions and industries require specific state licenses. These can include healthcare services, construction, and real estate, among others. It’s important for US-bound Japanese businesses to research the specific licensing requirements of the state where they plan to set up shop.
County and city licensing requirements can also apply, particularly for businesses with a physical presence such as a storefront or office. These can include zoning permits, health department permits, and occupational permits. Foreign Web3- and digital media-oriented businesses also face a rapidly evolving regulatory landscape in the US.
Privacy and Consumer Protection
Unlike Japan’s Act on the Protection of Personal Information which applies uniformly across the country, the US currently has no consistent federal privacy law. Instead, privacy protection is governed by individual state laws, each with their unique stipulations. One significant piece of legislation is the California Consumer Privacy Act (CCPA), as amended by the California Privacy Rights Act (CPRA), in effect since January 2023. However, the CCPA and CPRA apply only to businesses that collect personal information of California residents, and either bring in gross annual revenues of more than $25million, buy, sell, or share personal information of more than 100,000 Californians, or derive more than half their revenue from trading in this personal information.
Gamma Law is a San Francisco-based Web3 firm supporting select clients in complex and cutting-edge business sectors. We provide our clients with the legal counsel and representation they need to succeed in dynamic business environments, push the boundaries of innovation, and achieve their business objectives, both in the U.S. and internationally. Contact us today to discuss your business needs.