International Business Law Advisor Insights on International Litigation & Transactions

The 5 Key Factors You Must Consider When Establishing a Foreign Corporation.

Posted in Business Transactions, Corporate Governance, international business, international law, international manufacturing, international trade

foreign corporation, international business, international business attorneyThe other day I received a call from someone looking to form a corporation in Brazil.

This person was shocked to learn that Brazil is among the most difficult countries in the world in which to incorporate a business.

In fact, according to the World Bank’s annual Doing Business Report, Brazil was ranked no. 121 in ease of starting a business.

This means that there are 120 other countries in the world ahead of Brazil where it is easier to incorporate a business including Botswana (No. 99), Ghana (No. 112), Kazakhstan (No. 25) and Macedonia (No. 5)

The point is that incorporating a foreign corporation is far from straightforward.

Time and time again I see folks assuming that forming a foreign corporation is as easy as it is here in the U.S.

I mention all this because the fine attorneys over at Baker & McKenzie LLP published an excellent article for anyone looking to establish a foreign corporation.

The article, Foreign Incorporations 101: Ten Things To Consider When Incorporating Abroad, does a great job of identifying ten key factors companies should think about before “going global.”

As the article points out, “establishing a registered presence (subsidiary, branch, representative office) abroad may, depending on the jurisdiction, be burdensome, time consuming, document-intensive, and costly.”

There are a variety of factors that U.S. companies must consider when establishing an international presence. While the article identifies ten considerations, special attention should be given to the following five:

1. Decide on Corporate Form: The four most common corporate forms are:  corporation, LLC, branch, and  representative office. Special rules may apply for each.  In China, for example, the entity forming an RO must have been in existence for no less than two years.

2. Identify Your Business Purpose

Unlike in the U.S., the business purpose of an entity in a great number of foreign jurisdictions require that the business purpose of the entity to be described in detail.  Simply stating “for any and all legal business purposes” will not suffice.  For example, in Switzerland, if a GmbH is formed for the purpose of acquiring assets, its articles of association must set forth the assets to be acquired, the seller’s identity; and the amount of consideration paid.

3.  Choose the Corporate Name

As the article correctly points out, the great majority of foreign countries have specific requirements regarding corporate names.  China, for example, has strict requirements governing corporate name.  Also, in many jurisdictions such as Malaysia and South Africa, local authorities must approve a name before the business can be incorporated.

4.  Determine the Officer and Director, if any

There are some countries that do not recognize the U.S. concept of “director and officer.”  For example, in a German, Austrian, or Swiss GmbH, there is no such things as “board of directors.” Residency requirements may also apply. In Argentina, the majority of the board of managers (of an Srl) or of the board of directors (of an SA) must be domiciled in Argentina. Similar requirements are found in Brazil.

5.  Quantify Capital Requirements

The minimum capital necessary to form an entity varies by country. In many European jurisdictions, for example, a specific amount is required. Other countries base capitalization on concepts such as reasonableness, operating costs or practical considerations, as is the case in Chile and Colombia.

Post Incorporation

Even after a foreign entity has been incorporated, there are additional items to consider

These considerations include license applications(s), taxation issues, obtaining payroll and customs ID numbers and opening a permanent bank account (e.g., for a Russian LLC).

Conclusion

Becoming familiar with the local laws pertaining to the formation of a foreign corporation is critical to any international business endeavor.

Be sure to consider the five key factors above and you’ll be well on your way to building your own global business empire.