We've all heard the story about the cat in the microwave in America. The packaging didn't specify not to do it, leading to a hefty multimillion-dollar lawsuit. Doing business in America often means it's not a matter of if, but when, a lawsuit will land on your desk.
Please note: This article does not provide legal advice and is not a legal document.
When a European company enters the U.S. market or seeks to expand its operations in the United States, it must take numerous legal considerations into account. While it may surprise you to learn that the U.S. does not hold the highest number of lawsuits per capita, the country is undeniably known for its litigious culture and substantial monetary claims.
It is crucial for European companies to be aware of these potential liabilities and to take necessary precautions to protect themselves. Here are some tips to mitigate risks and safeguard your business from legal issues in the United States.
Many European entrepreneurs opt for what's known as an export blocker entity. You can establish this entity in your home country with your own notary. Under the holding company, you create a new Export entity, which is a standard operating company entity, and beneath that is the new Inc.
In the video below, we explain this setup:
As a European, you have the option to establish an Inc. directly as a European BV, or to introduce an export (buffer) BV in between. This decision is always based on potential lawsuits and claims, revenue, and tax structure. Depending on your personal situation and the advice of your accountant or notary, we can assist you in making this choice.
The term “blocker entity” is something every experienced U.S. attorney will recommend, and among accountants, the concept of a “blocking entity” originates from the tax angle. These are fiscal structures, but a Buffer BV serves a different purpose. It's more aligned with the "cat in the microwave" story—a legal construct that, combined with contracts, agreements, insurance, and more, helps block potential liabilities. So, imagine starting with just one entity for your U.S. business. You set up your Inc. based on what works best for you and your company.
Engage an experienced legal advisor familiar with the U.S. legal systems and practices. This advisor can assist in drafting and reviewing contracts, advising on local laws and regulations, and providing general legal guidance. It's essential to establish a good working relationship with your legal advisor and communicate openly about your business activities and risks.
Ensure that your business complies with all requirements and standards of the U.S. market. This may involve product safety, labeling, labor and environmental regulations, and other industry-specific guidelines. Make sure you are fully informed about these rules and maintain compliance to avoid potential liability issues.
Another crucial step is securing the appropriate insurance policies to protect your business against potential liabilities. Consider liability insurance, product liability insurance, and commercial liability coverage. These insurances can help cover costs in the event of lawsuits, claims, or other legal issues. We are happy to connect you with an experienced international insurance advisor to determine the right coverage for your business.
"Everything that could be claimed against you in a lawsuit, everything a judge could seize to satisfy a judgment, is what you want to protect."
Hopefully, your business will grow, and the American company will become increasingly valuable, likely with many assets such as inventory. You want to protect everything that could be claimed against you in a lawsuit, everything a judge could seize to satisfy a judgment. If you only have one entity that is 100% owned by, for example, the European parent company, it becomes much easier to access those assets. However, it certainly makes sense to have a second entity that, so to speak, effectively blocks U.S. courts and judgment collectors from reaching whatever you might have.
And that usually involves a holding structure where the European entity owns the holding company, which in turn wholly owns a U.S. entity. This U.S. entity then has a subsidiary, which can also be an Inc., and may even have multiple subsidiaries. The more successful a U.S. entity becomes, the more logical it is to have different Inc.'s—one holding all the intellectual property, another owning all the real estate, and yet another serving as the operational entity.
We are strong advocates of blocker entities. In this context, your Export BV serves as the Dutch Buffer BV, while in the U.S., it functions as the Blocker Entity, complete with a separate Holding Inc. (Blocker Inc) overseeing underlying American entities. Which option works best for you? Schedule a complimentary introductory meeting. We'll assess your current structure, your plan, and goals for the U.S., and, in consultation with an experienced American attorney, determine what best suits your business needs.
Liability can extend to the European parent company, especially if the U.S. subsidiary is merely a 'shell' or 'puppet.' In this scenario, the European parent company is viewed as the actual decision-maker, rather than the U.S. subsidiary. This liability isn’t established lightly. Some contributing factors include the parent company's control over the U.S. subsidiary, overlaps in personnel, and accounting practices. Ignoring these considerations can lead to significant liability claims. Determination is based on a thorough analysis of the overall situation.
Often, a business begins with a single Inc. in America. After a few months or a year of growth, a U.S. holding structure with underlying operating companies might be established, or a separate entity for, say, the real estate. If an investor or new shareholder comes on board, restructuring is typically necessary.
Every company is unique, so compare it in Europe to a Holding BV with a subsidiary Operating BV. Often under the same holding, there might also be a Property BV and a Pension BV. By establishing a separate Export BV as a Buffer BV in Europe, you follow the advice of top international legal experts in this field.
In the USA, you typically start with at least one Inc. If the plans are larger, we often see a Holding Inc with a subsidiary Operating Inc. Asset protection is always customized. It's important to identify where the risks and interests lie.
"The most common mistake is attempting to conduct business in the United States directly from a European Entity."
The most common mistake is conducting business in the U.S. directly from a European Entity. We occasionally hear comments like, "But that's been going well for a long time" or "We've been doing it this way for years." Well, driving blindfolded can also go well for a while. We also sometimes hear questionable advice from European accountants who assume that doing business in America is similar to doing business in Europe. Always ensure a comprehensive international approach that provides adequate protection for the parent company in Europe.
There are no shortcuts for protective structures. We're here to help you examine this topic from various angles to make well-informed decisions on legal, fiscal, and business operations in America.
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While it's not exactly the same, an INC is somewhat similar to a BV or GMBH.
We are more than happy to provide a customized quote for your business.
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