State of Incorporation

State of Incorporation

Alas, not the most popular state to incorporate in

Europeans often think that they are catching up to the US, at least in terms of harmonized and consistent laws, but in many instances our system is actually more federalized than that of Europe. Whereas you can now form a European corporation, US corporations are formed under the laws of a particular state, rather than under the federal (United States) law. Typically, that means you’ll have to decide between the state in which you’ll actually be headquartered or operating (assuming you know which state that is) and one of the states which has advantageous tax or corporate laws for corporate formation.

Traditionally, Delaware has been the first choice of most corporations because of its favorable tax and corporation laws, but other states such as Nevada, Alaska, and Wyoming have also been trying to get into the lucrative business of corporate services in recent years. If you’ll be operating completely within the border of a single state, you might as well incorporate in that state, but most German businesses are seeking to sell throughout the United States so a Delaware (or other law-tax state) corporation will be more advantageous. There is no equivalent to the European Corporation (SE) in the United States, so every US company will have to choose a state of incorporation.

Even more confusing, if you will be operating in a state outside of your state of incorporation you will have to file for authorization to do business in that state (or those states) as a foreign corporation. That’s right, a Delaware corporation doing business in California or even neighboring Pennsylvania is considered “foreign” for the purposes of state law, just as a German corporation would be, and may have to register as a foreign corporation. Although state laws regarding filing for authorization differ, it’s a safe bet to say that if you’ll have employees or physical assets based in a particular state you’ll be required to register in that state.

So, for example, if you form a corporation under the laws of Delaware, but will have your offices in New Jersey, you’ll form the corporation in Delaware and then file for authorization to do business in New Jersey. If you also have branch offices in California and North Carolina, you’ll need to file for authorization in those states as well. Filing for authorization in a particular state triggers other obligations as well, including the obligation to file an annual tax return and, usually, to file papers with the state relating to labor, taxes, and other fees. For any state in which you do not have a physical presence you’ll also need to pay a registered agent to accept mail and service of legal process on your behalf, which usually costs no more than $200 per year.

This is the first in an occasional series of posts on starting your business in the US.

So long e-signatures, it was nice to know you.

DocuSign screenshot

We recently bought a house or, more accurately, a bank bought a house which we own a teeny-tiny part of. That, of course, resulted in an unending series of requests by mortgage companies, banks, title companies, realtors, sellers, etc. for signatures on long and seemingly duplicative documents. In most of those cases, our signatures were obtained via DocuSign. That’s become pretty standard practice in the real estate industry these days, and also in other industries which require large numbers of signed documents. While it’s annoying, I suppose it beats having an equally large pile of signed originals in a file somewhere.

Or maybe it doesn’t. According to a recent memorandum in a California court, however, a “signed” DocuSign document might not be enough. The judge in that case sanctioned an attorney for relying on DocuSign signatures in the context of bankruptcy law, pointing specifically at a requirement that electronic signatures are only valid if a copy of the “original” signed document was retained. DocuSign, of course, has based its entire platform on the idea that the digitally signed document is the original, which may now be in serious doubt.

For now, the memorandum serves as a reminder that users of digital or e-signatures have to be certain that the laws pertaining to that particular transaction allow e-signatures without a “wet signature” to fall back on in the event of a dispute. Bankruptcy lawyers in particular, take note. That being said, the logic behind the memo calls into question the entire premise behind electronic and digital signatures and, if followed, may end up being a really good development for paper companies. After all, if I sign by putting my name following /s/ in an e-mail, or using the signature function in Apple’s Preview application, the potential authentication issues raised in the memo are exactly the same as raised in this case.

I’ll keep that in mind if we have second thoughts about this whole home-ownership thing.

Hat tip to Whitney Merrill (via Twitter, @wbm312)

Hey, I’ve lost my company’s domain name!

Whois screengrab

I love me some VT 220 (ok, faux VT 220, but close enough)

The registration system for domain names isn’t really set up for corporate ownership, since the “owner” of a domain name is typically the person who is listed as registrant rather than the corporation. The down side of this system is something we see all the time, particularly with small companies – a domain name is registered by a well-meaning, tech-savvy employee (all too often in his or her personal account) and, when that employee moves on, the company is stuck without control over critical domain names and related accounts. If the employee is fired, it’s even worse, since the now-disgruntled employee may well have control over the company’s entire online presence for an indeterminate period of time.

While there’s no silver bullet here, there are a few best practices which make it easier to regain control over a domain under the control of a wayward (or simply unreachable) ex-employee. Those are:

  • Make sure the company name and address is listed as the Registrant, along with the name of an officer who is most likely to remain with the company. The tech savvy employee can be listed as administrator, to facilitate management of the domain without jeopardizing ownership.
  • Corporate web assets should be held in an account which is in the company’s name and paid for with a company credit card, and should be kept separate from other business or personal websites and domains.
  • Have an agreement in place making it clear that, upon termination of employment for any reason the domain name registrant and admin are to be changed to an officer of the company’s choosing. Ideally, this should be in a standalone agreement so you can provide it to the registrar without divulging hiring or salary information.
  • Make sure renewal notices and the like go to a generic e-mail address, ideally one which is monitored by more than one person, so that termination or resignation of an employee doesn’t result in a lapsed registration (although there are downsides to this as well).
  • Make sure someone other than the admin knows the password to the account (but be judicious, you also don’t want the password becoming generally known). For particularly active accounts, you may want to request a regular update confirming the password and listing all domain names along with expirations dates for the corporate account.
  • Make sure all domains are registrar locked against transfer and deletion

The above isn’t foolproof, since a knowledgeable or well-placed employee can manage to retain control no matter what the circumstances, and given that registrars differ in how they handle requests relating to domain name ownership. Also, be aware that some of the above suggestions may have downsides as well, so consider what’s best for your organization when determine who has access to accounts and how.

Of snow and “Acts of God”

IMG 4108

Once again, into the breach …

As we prepare for what weather forecasters are swearing will be a foot or foot-and-a-half of snow (I’ll believe it when I’m shoveling it off of my driveway), it got me thinking about snow and force majeure clauses in contracts. Yes, unfortunately, instead of sledding or snowball fights, that’s where the lawyer’s mind goes. Oh for the days of Calvin-esque excitement at the prospect of a heavy snowfall.

But I digress …

Force majeure clauses are those long paragraphs in contracts which refer to all sorts of horrible things which could happen, but likely won’t. For example, one picked at random from my files includes “acts of God, actions by any government authority (whether valid or invalid), fires, floods, windstorms, explosions, riots, natural disasters, wars, sabotage, acts of terrorism, or court injunction or order.” The term, adopted from the French for “superior force,” is meant to cover external events or circumstances which prevent timely performance of a party’s contractual obligations. The key issues are typically whether it the event prevents performance and whether the party in question has any control over the event or circumstances which caused the impossibility.

As with so many other areas of contract law, US lawyers have added language to these clauses which would seem to deviate from the original idea of an obstacle which simply could not have been foreseen or prevented. As one blogger noted, the drafting of these clauses has become “a kind of arms race, with drafters throwing in ever more scenarios [which] evoke someone’s fevered vision of the apocalypse. I half expect to see, one of these days, ‘the Rapture’ added as an element.” Frankly, I’m sure the Rapture has been added to one of these clauses before, although I don’t recall having seen it.

At any rate, that brings us back to snow. The coming snowstorm, as predicted, would probably qualify as a force majeure in this area, since it’s well beyond the norm (whatever that means for weather these days) and could well close many roads for 24 to 48 hours. Of course, whether that actually prevents timely performance or not depends on what you do for a living. As a lawyer, I can generally complete my work from my kitchen table if need be, so it would take more than just a snowstorm to prevent performance of my obligations unless the internet goes down. Construction workers, road workers, or others whose work depends on travel may well have an argument that force majeure resulted in a delay for which they should be excused. Where possible, parties to a contract should try to mitigate the effects of the force majeure wherever possible (as our milk delivery people are doing today by delivering our milk a day early, thanks, by the way). Fortunately for the local construction industry, the mild winter means many contractors are ahead of schedule, so a day or two of interruption might not matter as much. In that case, they may be fretting for bonuses lost because they can no longer finish as early as they might have, but that’s a topic for another post.

If it snows tomorrow, I plan to settle in in front of the fireplace with a hot coffee or tea and perform my obligations as best I can. Of course, that’s reckoning without the interference of a force majeure beyond anyone’s control, namely, my children, who will likely be home from school.

The Basics of US Employment Law Part III: Vacation Time

This blog in the US Employment Law series focuses on vacation time.

One of the key differences between United States employees and employees in most of Europe is the amount of vacation time employees have come to expect. American employees think that four weeks vacation is extremely generous. Europeans, on the other hand, commonly enjoy four or more weeks of vacation even at entry-level jobs, and many European countries mandate a minimum amount of vacation time.

In the US, there are no federal laws mandating how much paid time off an employee must receive. Absent a collective bargaining agreement or other employment contract, most US employers do not have to offer any paid time off to their employees. However, some local laws mandate a certain amount of paid time off, including my home city of Philadelphia, which requires employers with a minimum number of employees to offer a certain amount of paid sick leave. There are also laws governing unpaid time off, such as the federal Family and Medical Leave Act. So employers should be sure to check with their legal counsel about their particular requirements.

It is also important for employers to understand that although they may not be legally required to offer any paid time off, a certain amount of paid time off has come to be expected in the US as a matter of practice. One might say that vacation time in the US is largely governed by custom. Most salaried (i.e. non-hourly) employees expect to receive one to two weeks of paid time off per year. This paid time off may be in the form of some combination of vacation time, sick days, and personal days. As employees advance in their careers, they expect to receive more vacation time. In general, it is customary for employees to receive between two and four weeks of vacation time per year, depending on their level of experience and years of service, with more senior executives enjoying more generous paid time off packages. Most entry-level jobs provide up to two weeks vacation. Six or more weeks of vacation time is generally reserved for the most senior executives – those who have worked hard, proven their loyalty, and are being rewarded towards the end of their career.

A common problem multi-national companies face is when they bring over an employee from Europe to work in the US office. The European employee often expects to continue to receive her four to six weeks of vacation. This, however, may not go over too well with her US colleagues working in the same office at the same level, but who are only getting two weeks of vacation. Employers need to be sensitive to this potential land mine.

The Basics of US Employment Law Part I: Protected Class Discrimination at the Federal, State, and Local Levels

For the next few weeks I will be doing a blog series on some of the key elements of United States employment law and how they differ from European employment law. This blog series is meant to familiarize Europeans (and others) who may be breaking into the US market and employing people in the United States. Topics covered in this series will include whether and how employees can be fired, vacation time, group benefit plans, and overtime pay.

Employment law in the United States is quite different than in most European countries. In general, the laws in Europe are considered much more protective of employees. For example, it is generally more difficult to fire an employee in most European countries than it is in the United States. While this may appear to benefit European employees, there is a flip side: an employer who does not have the ability to easily fire someone, may be more reluctant to hire in the first place, making the job market more competitive for employees. When employees are less willing to leave one job in search for another, the result is a more stagnant job market. While this may be great for people with good jobs, it may not be so great for those trying to break into the job market or make career changes. Proponents of United States employment law might argue that our less restrictive employment laws create a more productive work force as well as more job opportunities for the American worker. However, this blog series is not meant to be a commentary on the merits of one country’s employment laws over another’s. The purpose of this series is to explore some of the core principles of United States employment law.

One of the first concepts to understanding employment law in the United States is to understand that employment law is governed by both federal and state law. Accordingly, an employer located in Pennsylvania will be governed by both Pennsylvania employment law and United States federal law. In addition to state laws, there may be additional laws and ordinances for the city or township in which your business is located. While cities and states have a significant amount of authority to govern the laws that employers and employees are subject to, there are certain federal laws that trump any state or local law. The general rule of thumb is that while state and local laws can and often do provide additional protections for employees, state and local laws are not going to be less protective of employees than federal law.

One of the most notable categories of federal laws that apply to all employers and employees regardless of the state in which the business is located are the laws that protect employees against discrimination on the basis of certain protected classifications. These classifications include race, gender, religion, national origin, disability, and age. Accordingly, no state law can permit an employer to fire an employee, or chose not to hire a job applicant, on the basis of any of these protected classifications. State and local law can, and often do, go further and provide additional protections to employees. For example, while federal law does not prohibit private employers from discriminating against an employee on the basis of sexual orientation, many states and cities have enacted such prohibitions. Pennsylvania does not include sexual orientation in its listing of protected classes, but the City of Philadelphia (along with Pittsburgh and several other Pennsylvania cities) does prohibit employment discrimination on the basis of sexual orientation.

The next blog will examine the concept of employment at will.