WHY SELECT THE UNITED STATES OF AMERICA?

The United States and American businesses are well known for a characteristic that evokes enthusiasm and veneration. The United States is perfect for entrepreneurs because the country consists of many different geographic and demographic consumer markets. Each market has distinct tastes, distribution systems, purchase behaviors, and regulations. This introduction will show many reasons why the United State is ideal for beginning a business.


The
Economy

With a gross domestic product over $14 trillion, the United States has the world’s largest economy. Further, the country´s per capita GDP of over $47,000 leads the world economies. The United States sustains free trade agreements with 17 countries giving US investors unprecedented access todiverse markets around the globe.


Leading
Consumer Market

The combination between the country’s large population and an average household income of over $50,000 makes US markets highly diverse in consumer tastes, income, and national origin. Thus, energizing success in a wide variety of business models. Most of the new trends in global consumer markets start in the United States and brands are not considered truly global until they penetrate the U.S. market.


Business
and Investment Climate

AT Kearney ranks the United States second in Foreign Direct Investment. Moreover, the country ranks number four in the World Economic Forum´s competiveness category and number five in the World Bank´s Ease of Doing Business category. These rankings prove that the United States has an attractive business and investment climate.


Research
and Innovation Center

The US was responsible for over 41% of all expenditures in research and expansion in developed countries in 2007. Furthermore half of the worlds’ scientific researchers work in the United States. U.S. Companies dominate the World’s 50 Most Innovative Companies Ranking. Within innovation ranking, US companies take all the top four rankings, six of the top ten, and 22 of the top 50 [Bloomberg-Businessweek].


Information
Technology

The Business Week´s Information Technology ranking puts 43 US companies within the top 100 companies while the Organization for Economic Co-operation and Development´s OECD lists 18 U.S. companies inside the top 50. The U.S. market is the home of new products, ideas and innovation.


Role
model for Intellectual Property

The world´s leading Intellectual Property Right (IPR) system can be found in the United States. The system receives more than a million patent and trademark applications each year. The transparent and predictable legal system resolves disputes quickly, often before significant expenses are incurred. Furthermore, businesses can rely on the US´ comprehensive enforcement capabilities, which protect a businesses intellectual property rights from infringement.

STARTING A BUSINESS

Starting a business in the United States can be a rewarding venture for foreign businesses because citizenship and residency are not required. Foreigners compete without much more red-tape than American-born business owners would.
Before starting a business, the business owner has to figure out which company type he or she wants to choose. Each company type has key advantages and disadvantages. The decision to file for either a DBA (sole proprietorship), corporation, LLC., or partnership depends on the particular owner’s situation and goals.

Sole Proprietorship

A sole Proprietorship is a very common popular way to start a business. In the US Sole proprietorship is an unincorporated business, owned and run by the same person. Further, no differences exist between the owner and the business, meaning the owner holds all responsibility for the business´ debts, losses and liabilities.


How to form a proprietorship

A sole proprietorship is easy to create, because an entrepreneur does not have to take a formal action when starting the business. The only owner of a company already owns sole proprietor status. However, if an owner chooses to use a different name, he or she must file a doing business as (DBA). The company’s name must be original and no other company can already own or use the same name for a similar course of commerce. Filing a DBA gives a company the possibility to transact business using a different name. While some states have state-level DBA filings, it mainly takes place at the county level. If a person wants to do business and did not file a DBA he or she can only do business in their original name. For example: Al Meier has to file a DBA to use the name “Al Meier Cleaning” for his company. Moreover, a corporation or LLC needs to file a DBA when they want to do business under a different name than the one that is already registered. Filing a DBA does not provide the same ongoing requirements like forming an LLC or corporation making it advantageous for sole traders. Further, DBA filing does not prove liability protection and tax advantages. A DBA filing does not change the official name of the company. The filer can only use a different company name in trade.

What are the taxes?

Because the business owners and the business are the same, no extra taxes are necessary. The income of the owner is the income of the company. You report income and/or losses and expenses with a “Schedule C” and the standard form 1040. The “bottom-line amount” from Schedule C transfers to your personal tax return. It is the owner’s responsibility to withhold and pay all income taxes, including self-estimated. More information about sole proprietorship taxes and other forms can be found at IRS.gov.

Advantages:

  • Very simple, inexpensive.
  • No consulting with others because the business owner is the business.
  • Lowest tax rates of the business structures.
Disadvantages:
  • The business owner can be held liable unlimited and increasing the risks of liability.
  • Business owners cannot sell stocks making it harder to find investors and make profits. (Source 4)
Limited Liability Company (LLC)

A LLC is formed under state law, as opposed to federal law, and gives personal liability protection. LLCs act as a legal structure hybrid that combines tax efficiencies and features of a corporation. Owners are “members” and, unlike shareholders in a corporation, LLCs are not taxed as a separate business entity. The owner is seen as a disregarded entity. The members report profits and losses in their personal federal tax returns.

How to form a Limited Liability Company?

Due to the fact that the law in the United States varies from state to state, the fees, documents and order depends on the state you choose for your company.

Step 1: Reserve the name of the company, finish the “Articles of Organization” document and choose the company´s operating agreement. The business name has to follow three rules:

  • Must be different from an already existing one in the state.
  • Must indicate “LLC.”
  • Must not include words restricted by the state.
The Article of Organization is a document that legitimizes the LLC and includes information like the business name, address and the members’ names. The operating agreement includes percentage of interest, allocation of profits and losses.


Step 2: Apply for a federal identification number (EIN) for tax and employer purposes. The EIN is used for tax and employer purposes only. The IRS Form SS-4 is available from the US Internal Revenue Service.

Step 3: Register to collect State sales tax.

Step 4: Register as an employer with the Unemployment Insurance Division at the states Labor Department.

Step 5: Do you need workers compensation and disability insurance? The company’s federal employer identification number (EIN) is the company’s primary identification with the Workers’ Compensation Board or allows the company to become a member of a self-insurer group authorized by the Board. The company must give its EIN to its insurance carrier when obtaining or maintaining its workers’ compensation or disability coverage. Workers’ compensation insurance floor is calculated using each employee’s risk classification, salary, and total payroll.

Step 6: Arrange for publication and submit certificate and affidavits of publication.

The taxes:

From the federal government´s point of view a LLC is not a separate tax entity and as a result is not taxed. However, the federal income taxes pass on to the LLC´s members and are paid through their personal income tax. Since the federal government does not recognize a LLC as a business entity for taxation purposes, all LLCs must file as a corporation, partnership, or sole proprietorship tax return.

Advantages:

  • Due to limited liability, the members of an LLC are protected from personal liability for business decisions or actions. Be aware that the members are not necessarily protected from wrongful acts.
  • Less paperwork, start-up costs, and recordkeeping.
  • It is up to the members who earned what percentage of the profits or losses. Fewer restrictions apply.
Disadvantages:


  • If a member leaves a LLC the business dissolves, but all remaining legal and business obligations have to be fulfilled. The life of an LLC is limited.
  • Members are considered self-employees and have to pay the tax contributions, Medicare and social security.
C Corporation


A corporation is a legal entity set up under state law protecting owners/ shareholders from creditor claims. If you incorporate your business it will automatically be a regular or “C” corporation. Furthermore this company is a separate taxpayer, with income and expenses taxed to the corporation and not owners. Because of this, many small businesses do not choose the “C” corporation type for their company. When corporate profits are distributed to owners as dividends, owners must pay personal income tax on the distribution, creating “double taxation” because the profits are taxed at the corporate level as well as at the personal level as dividends.

How to form a corporation

To form a corporation the owner has to establish the business name and register the legal name with the state government. Most likely a fictitious name (DBA), most state laws say that corporations must include a corporate designation at the end of the business name. You need to file certain documents, typically articles of incorporation, with the states Secretary of State’s office. Once the business is registered, you must obtain business licenses and registrations.
Taxes:
Corporations are required to pay federal, state, and in some cases, local taxes. Most businesses must register with the IRS, state, and local revenue agencies, and receive a tax ID number or permit.

Advantages:

  • Shareholders‘ personal assets are protected and held accountable for their investment in stock in the company.
  • Corporations raise capital for their businesses and have the ability to raise funds through the sale of stock.
  • Corporation owners only pay taxes on corporate profits in form of salaries, bonuses and dividends, which is mostly lower than a personal income rate.
Disadvantages:
  • Corporations are costly and time-consuming ventures to start and operate.
  • The company can be taxed two times: When the company makes a profit and when dividends are paid to shareholders.
  • Corporations are regulated by federal, state, and local agencies and require a large amount of paperwork.
S Corporation

If the company is already incorporated, the business owner can elect S corporation status by filing a form together with the IRS and the state. Once completed, the profits, losses, and other tax items pass through the corporation to the owner and get reported on that owner’s personal tax return. According to the IRS, these corporations are “considered by law to be a unique entity, separate and apart from those who own it.”

How to form an S Corporation

The first step before forming an S corporation is to file for a corporation. All the shareholders must sign Form 2553 agreeing to transform the company to an S Corporation.

Taxes

No two states maintain equal law concerning S corporations. Consequently, some states recognize S corporations similar to the federal government’s treatment of S corporations and tax the shareholders accordingly while other states treat S corporations like C Corporations. A small group of states tax the S corporations along with the shareholders proportional shares of the profits.

Advantages:

  • LLC members are subject to employment tax on the entire net income of the business, while only the wages of the S corporation shareholders (who are employees) are subject to employment tax. The remaining income is paid to the owner as a "distribution," which is taxed at a lower rate, if at all.
  • Most of the expenses can be written off as business expenses.
  • If a shareholder leaves the company the S corporation can continue doing business.
Disadvantages:
  • Due to the fact that S corporations are a separate structure than C corporations, S corporations require stricter operational processes like shareholder meetings.
  • Shareholders must receive reasonable compensation.
The business owner could pay higher employment tax because of an audit with these results. (Source 4)


The different business types have different advantages and limitations. C corporations, S corporations and LLCs provide the owners with personal liability protection. In particular, S corporations and LLCs are mainly used for small business companies and enable the business to grow and take on new owners. The price to set them up is roundabout the same, depending on filing and states fees. LLC members are self-employed individuals who owe Social Security and Medicare taxes, paid by self-employment tax on their share of business net income. Whereas S corporation shareholders are employees of their corporation, so Social Security and Medicare (FICA) taxes apply to compensation they receive, but not to distributions they receive.

Corporations and LLC´s bring several advantages for businesses, which a proprietorship or general partnerships do not include:

  • Limited liability protection for the personal assets of the owner(s).
  • Certain tax advantages, such as tax deductions, are not available to sole proprietors.
  • Opportunity to gain credibility with potential customers, vendors, partners, and employees.
  • Capital can be raised more easily

SPECIFIC KINDS OF ACTIVITIES

When forming a business in the United States, it is always wise to consult with a business attorney regarding the many facets that you face as an entrepreneur. This can help you identify the individual or company licenses that you may need to conduct business within the country. Below you will find an overview of different types of licenses that an individual or entity needs to begin conducting business in the United States.

Depending on the field of business that one is entering, a professional license may be needed. Professions that require the individual conducting business to be licensed include (list not exhaustive):

  • Doctor
  • Lawyer
  • Accountant
  • Engineer
  • Funeral director
  • Hairstylist
  • Electrician

State governments typically handle professional licensure, with standards differing from state to state. Often an individual will need to attend and complete a university program, a trade school, and/or have several years of experience before licensure can occur. Some areas of licensing require an examination to be passed before the individual is admitted and receives their licensing accreditation. Immigrants who have not properly registered with federal and state authorities are not allowed to receive professional or commercial licenses. Failure to go through the proper channels to receive a license, and then practicing in the profession as if you have one, can result in serious criminal penalties, including fines and jail time.

In addition to individual professional licensing, in the United States, certain businessesmust obtain a license in order to conduct transactions legally. These licenses are obtained either on the federal or state level, or both.

Activities that are regulated and supervised by the federal government will need to obtain a federal license or permit. These include (list not exhaustive): firearms, alcohol, commercial fishing, agriculture, and aviation. Each area requires a different application process, as well as different requirements that must be met to qualify for a license.

For example, if an entrepreneur were to open a restaurant and bar and wanted to produce and serve beer, they would need to register their business and obtain certain federal permits with the U.S. Treasury’s Alcohol and Tobacco Tax and Trade Bureau to produce the beer and the relevant local liquor licensing authority to sell it. The owner could start by contacting their local Alcohol Beverage Control Board for local alcohol business permit and licensing information.

There are three main types of businesses that must register on the state level. These include:

  • A corporation
  • A non-profit
  • A limited liability company or partnership
To determine what permits or licenses your business needs to operate on the state level, visit US SMALL BUSINESS ADMINISTRATION and enter the ZIP code your business is operating in. An entrepreneur must make sure that the correct permits and licenses are in place because in some industries, it is illegal to operate without these and the company or individual could face large legal penalties or sanctions.After a business retains the proper licenses and permits, it needs to begin thinking about

employees and whether the company will provide them with health insurance. Health insurance in the United States is primarily obtained through one’s employer in a private, employer-sponsored group health program. Health insurance protects a person who is covered from medical costs, which can be large. Employer-sponsored health care coverage is paid for businesses on behalf of their employees as part of employees’ benefit package. Typically, employers pay about 85% of the insurance premiumfor their employees, and about 75% of the premium for their employees' dependents.

The Patient Protection and Affordable Care Act, implemented in early 2014, requires employers with over 50 employees to offer health insurance to their full-time workers. If the company fails to provide insurance, there is a $2,000 tax penalty per worker.

Businesses that employ a smaller number of people (3-199) often provide small employer group coverage. Usually smaller firms are not legally required to provide health insurance under the Affordable Care Act to their employees (if they employ under 50 workers).

States regulate small group premium rates, typically by placing limits on the premium variation allowable between groups (rate bands).

EMPLOYMENT LAW

The National Labor Relations Act (NLRA) regulates employment law in the United States. Employment contracts may be written, oral, or implied. However, the employer and the employee will gain the most protection putting their agreement in writing.


In employment contracts, the parties agree on the terms of the relationship. Signing the contract develops a legally binding relationship for both sides. Most employment contracts are “at will.” “At will" employment results in a scenario where the employee is free to quit at any time and the employer may discharge the employee for any reason that is not illegal or at any time. In almost every state, an at-will situation is presumed, unless the contract creates a different arrangement. An employment contract does not necessarily change the employee’s at-will status. The contract can be used to discuss and agree on important details about the employment relationship.


For example, Bob’s Beverages decides to hire Greg. Bob’s human resources manager sends Greg a letter formally offering him the job, which includes information concerning the position, start date, benefits, salary, reporting requirements, job duties, and work hours. The letter also clearly states that Greg is to work at-will. Once Greg accepts and both the employee and employer sign the letter, it becomes a written contract for at-will employment by Greg at Bob’s.


The job’s duties and responsibilities should be part of the contract. Usually the agreement also states the payment in the form of an hourly wage, a fixed salary or commission and, if warranted, a bonus payment. Any other benefits the employee receives like health insurance (discussed below), life insurance, automobile allowance or moving expenses should be part of the contract.


The employment contract has to include a termination clause for either side. Usually the contract includes a termination provision that contains information about the notice that needs to be given by either party when intending to terminate the contract. For example, “Either party may terminate the employment agreement for any reason by giving two weeks’ notice.” It may also give the employer the right to terminate the contract if the employee violates it in any way.


A confidentiality clause protects the employer if an employee gets in contact with confidential or sensitive information. The contract should determine the employee’s restriction in revealing this company information. The confidentiality clause prevents the employee from disclosing the information to a third party or using it for personal gain. Possible topics requiring confidentiality include: future products, special equipment, and proprietary information, including employee lists and customer lists. The agreement should last for a certain agreed upon time after the employee leaves the company.


Contracts often include restrictive covenants such as exclusivity or non-compete clauses when the employer has trade or business secrets to keep. One example could be that an employee cannot work for a competitor engaged in a similar type of business, or rival company, once he leaves the current company. Another example of a non-compete clause may be that an employee cannot own stocks from a competing company or start his own competing company for a certain period of time. Usually the non-competition clause is limited to a certain geographical area. Different states will have different restrictions on non-compete clauses as well. For example, in Illinois, an employee must work for the company for at least 2 years in order for a non-compete clause to be valid and enforceable. All states, however, require any of these restrictive covenants to be reasonable in time, place, and scope, such that the employee can make a living.

Health Insurance

Health insurance is also often negotiated and included in an employment contract. Citizens in the United States often turn to their employers for healthcare assistance. As discussed above, employers will make a substantial contribution to the cost of coverage, and the employee pays the remaining fraction of the premium. Employees who wish to receive health insurance from their employers should expect to receive less in compensation than they would normally receive due to the cost of insurance premiums to the employer.

HOW TO FORM A CORPORATION

As briefly discussed in Section I, above, there are a few steps for registering your business in the United States.

Create a business plan.

When beginning a business in the United States, it is important to develop and commit to a business plan before putting in ample amounts of money and time. A good business plan up front will save you a lot of headache when it comes down to the nitty- gritty of filing and registering, whether it’s for the business name itself or some intellectual property (ie. trademark) later on. In this business plan, it is important to create a brand for your company. This typically includes the name, logo (picture), and a slogan or catch-phrase.

Ascertain the configuration of your business

This is where you decide whether your company will be legally classified as:

    • Corporation
    • Non-profit
    • Limited Liability Company (LLC)
The company will need to be registered with the Secretary of State’s office in the state that you are conducting business in. Your first choice of a business type is not permanent and it can be changed as your business grows and develops.



Registering your business name



Naming your business anything other than your own personal name will require registration with the appropriate authorities. The process of registering your business name is known as “Doing Business As” (DBA). It is important to note that when you form a business, the legal name of the business defaults to the name of the owner (individual), unless you choose to rename it and register it as a DBA name. This is important because the owner does not want to be legally and individually liable for an act of the corporation later on if something should go awry.

The legal name of the business is required on all government forms and applications, including applications for employer tax IDs, licenses and permits.

When is a DBA required?

  • Sole Proprietors or Partnerships (if you wish to start your business under anything other than your real name)
  • Existing Corporations or LLCs

Be familiar with your state’s laws – not all states require the registering of fictitious business names or DBAs. Registering your DBA is done either with your county clerk’s office or with your state government, depending on where your business is located. Further information regarding business registration is available at SBA.



Acquire a federal tax ID
Employers with employees, business partnerships and corporations, and other categories of organizations, are required to acquire an Employer Identification Number (EIN) from the U.S. Internal Revenue Service.

Register with your stat revenue agency

You are required to obtain Tax IDs and permits from your state’s revenue agency.



Acquire licenses and permits

The majority of businesses need to acquire some category of business license or permit to formally operate. Most small businesses are required to acquire a general business license / industry-specific operating permits from state and local government agencies. You may be required to be licensed at the federal, state and/or local level, depending on your business (discussed above). As well as a basic operating license, you might need specific permits, including a permit to serve alcohol on the premises.

IMMIGRATION

The immigration laws in the US regulate entry, duration of stay, and deportation of non-citizens.

The immigration law of the US allows a small amount of people to immigrate to the country.

The following four points are the main reasons for people to immigrate to the states:

  • Looking for freedom and safety
  • Looking for financial improvement
  • Reunion with their family
  • Follow their faith

Can
you live in the U.S. without being a citizen?

There are different types of people who are living in the US without having a Visa: lawful permanent residents, refugees, asylees, parolees, holders of Temporary Protected Status, visitors, students and others. While lawful permanent residents have the right to stay in the country, visitors, students, etc. are only allowed to stay in the country temporarily.

How to get a legal status?

About a million people immigrate to the U.S. every year. However, the immigration laws are very complex and, due to strict categories, permanent legal status is only available for a few people.

To gain a permanent legal status applicants have to follow these two steps:

  • Step One:
    • Applicants have to fit in one of the four immigration categories. If not, they may not be allowed to enter the states.
      • A close family member who is a U.S: citizen or lawful permanent resident
      • An employer or special skill
      • A special lottery of extra visas
      • Special category for protected classes of people
  • Step Two:
    • The applicant has to be eligible to acquire legal status in the US and complete a required background check before the application will be approved. Reasons for a visa refusal
      • Convictions for crimes
      • Threats to national security
      • Participation in persecution of others
      • Inability to show they can support themselves without receipt of government assistance
      • Having falsely declared oneself to be a U.S. citizen
      • Immigration violation
      • Being in the U.S. without permission for extended periods of time.

Can
people immigrate based on employment?

That there are only 140,000 Visas available for people who immigrate to the US permanently. Therefore, the government is very selective. Usually these applicants have to maintain exceptional abilities, be skilled workers or professionals, be religious workers, or be investors. Furthermore, to protect US citizens the employer has to prove that there are no US workers available for the specific position.

Can a foreigner own real estate?

Foreigners are legally allowed to own real estate in the US. However, owning real estate does not provide any legal basis for remaining in the country beyond prior legal obligations. Although citizenship or a green card is not necessary to purchase real estate, foreigners must register and acquire a Taxpayer Identification Number (ITIN). The ITIN gets assigned to foreigners to ensure the proper payment of taxes on the property.

Obtaining an ITIN consists of several steps:

  • The ITIN is issued by the Internal Revenue Service (IRS) or by a certified professional accountant approved by the IRS.
  • The applicant must fill out a Form W-7 (in English) or a Form W-7(SP) (in Spanish) in order to request the ITIN.
    • On the Form W-7, the applicant must provide a legitimate reason for acquiring the real estate
  • Depending on the applicant’s nationality, he or she might need to provide a valid foreign passport, visa, and two photo identifications, such as a driver’s license.
Foreigners can purchase land using their personal name, through some sort of business

entity—such as a domestic corporation, foreign corporation, limited partnership, joint venture, real estate investment trust, or limited liability company.

The law permits cash-only real estate purchases. However, US federal law mandates that any transaction over $10,000.00 must be reported to the government.

Buyers are required to pay for title search and insurance fees on the property. These charges can be somewhere between an additional 1 percent-2.5 percent of the total cost transaction.

  • For example, on a $300,000 real estate purchase, the additional title search and insurance costs would be a minimum of $3,000.
A foreigner’s tax liability in his or her own country varies depending on the country’s tax

treaty with the US. Foreigners should consult with an attorney familiar with that country’s treaty law to get more tax-related answers.

  • The US requires any income made from rental property to be filed on both the state and federal level. Tardiness or refusal to pay this income tax leads to more severe fines and/or legal action.
  • The Foreign Investment in Real Property Tax Act of 1980 authorizes the US to withhold income tax when property is sold, exchanged, gifted, transferred, or liquidated by a foreigner. The IRS takes 10percent of the proceeds along with additional taxing from the state government.

Sources:
  1. belgium.usembassy
  2. bizfilings
  3. doingbusiness
  4. SBA
  5. dol.gov
  6. justia.com
  7. law.cornell
  8. fairuse.stanford

INTELLECTUAL PROPERTY RIGHTS

As an employer it is important to protect copyrights, especially when an employer hires high-level researchers, engineers, software developers who may create inventions or make discoveries as part of their work. The contract should include the employer´s right to own trademarks, patents or trade secrets that come as a result of the employee´s work. Some companies retain all ownership of the inventions. Others share a percentage of royalties with the inventor-employee.


Dispute settlement

An employment contract should include ways to settle any disagreements amicably and out of court. If an arbitration clause is not included, the contract may specify the venue or jurisdiction of the court. Furthermore, the law differs from state to state and employment agreements will often include a choice of law that specifies which state´s law will be applied in interpreting the agreement.

Intellectual Property in the U.S.

Intellectual Property includes creative property such as writing, music, drawings, paintings, property, photography and films. Those “products of mind” can be saved with copyright, trademark, trade secrets and publicity and private rights.



Copyright

Copyright is a legal concept that allows a creator of a work the exclusive rights to reproduce, distribute, perform, display, and license the work. Also, the creator holds the right to prepare derivative works based on the copyrighted work.
Copyright law protects works such as paintings, writing, architecture, movies, software, photos, dance, and music ·

Requirements:

  • Works must be fixed: § Set out in a tangible medium of expression from which they can be perceived, reproduced, or communicated
  • Original and creative: § Must be authors own work & reflect exercise of creator’s judgment (work does not need to be novel) o Registration (recommended not required) at U.S. Copyright Office. Only required to file suit for copyright infringement
Patent


A patent is essentially a limited monopoly whereby the patent holder is granted the exclusive rights to make, use, and sell the patented innovation for a limited period of time.


What is patentable?

  • Examples
    • Process, machine, a manufacture or product, a composition of matter, an improvement on any of the above (must get permission from original patent owner)
  • Not patentable
    • Naturally occurring things and laws of nature

Trademark


A trademark is any word, name, symbol, design, or any combination thereof, used in commerce to identify and distinguish the goods of one manufacturer or seller from those of another and to indicate the source of the goods.
  • Example: Trade name (McDonald’s), trade image (Ronald McDonald), trade logo (golden arches), trade dress (orange & red of McDonald’s)

Trade secrets


Trade Secrets are information that derive actual or potential economic value from the fact that it is not known or readily ascertainable by others, and is subject to reasonable efforts to maintain secrecy (Ex: Coke formula)

  • Advantage:
    • Secrets not limited in time, no registration costs, has immediate effect, does not require compliance w/ any formalities
  • Disadvantage:
    • Others can legally use the secret if acquired through reverse engineering

Right of Publicity


The Right of Publicity is a patchwork of state laws, which protect the image and name of a person. As a result it is illegal to use a person´s name and image for commercials without having their agreement. Nevertheless the law varies from state to state.

Right of Privacy

The right of privacy is not part of the intellectual property laws, but prohibits the publishing of information about some person’s personal affairs. The law should prevent people from exposing private facts or from falsely portraying others. Exceptions may occur for public figures like politicians.


U.S. Antitrust law (Competition law in Europe)

The Antitrust law ofthe US is a collection of federal and state government laws regulating the organization of business corporations to promote fair competition for benefitof costumers.

Types of prohibited anticompetitive schemes:

  • The Sherman Act and Clayton Acts:
    • Monopolization: The acts constitute a felony and a conviction for monopolization. Charges require proof that the company intentionally tried to monopolize.
    • Price-fixing: Price fixing is the process of keeping the price artificially on a specific level. Regardless if the scheme is vertical (parties in the same chain of distribution) or horizontal (competitors on the same level), this process is an illegal restrain on trade.
    • Collusive Bidding: § Collusive Bidding describes an agreement between competitors to change the bids they otherwise would have offered absent of the agreement. The acts make this practice illegal.
  • Tying arrangement: The term “tying arrangement” describes an agreement, in which the selling party conditions on the buyer´s agreement to buy another product (this product is called a “tied” product). An arrangement is called a tying arrangement when the seller makes it a condition that the buying party is not allowed to buy another product from a competing company. The Clayton Act prohibits this business practice.

ACCOUNTING AND TAX ACCOUNTING

It is important for a business to perform good bookkeeping practices. The purpose of accounting practices in the United States are to present an entity’s financial position and improve the performance of a business. In the U.S., historically, the American Institute of Certified Public Accountants, subject to the regulations of the Securities and Exchange Commission (SEC), have set accounting standards. As corporate finances can be complicated, it is important to employ and entrust a certified public accountant (CPA) with handling the corporation’s finances.

There are four basic principles that companies must follow in their accounting practices:

  • Historical cost: requires company to account and report based on acquisition costs and not fair market value for assets and liabilities.
  • Revenue recognition: companies may not record revenue until (1) it is realized and (2) when it is earned.
  • Matching: expenses have to be matched with revenues.
  • Full disclosure and responsibility: information disclosed should be enough to make a judgment while keeping costs reasonable. Information is presented in the main body of financial statements, in the notes or as supplementary information. Senior executives must take individual responsibility for the accuracy and completeness of corporate financial reports.

Not every corporation will have their taxes scrutinized by the government, however, when the government suspects fraudulent financial activity on the part of a non-public corporation’s finances, they will conduct an audit. During this audit, the government will check the books of the corporation to make sure no underhanded practices were taking place.



Taxes

In the U.S., there are many, many types of taxes on both the federal and state level. American residents and citizens are taxed on worldwide income, while nonresidents, such as residents of Poland, are taxed only on income within the jurisdiction of the U.S.. These can be broad, such as personal income tax, or specific as bottled water tax in Illinois. Here is a list of the most recognizable and important to know taxes in the UnitedStates:

  • Corporate tax
  • Personal income tax
  • Payroll tax
  • Estate and Gift tax
  • Revenue tax
  • Sales tax
  • Property tax
  • Hotel tax
  • “Sin” tax (cigarettes, alcohol)
For entrepreneurs, the most important taxes on the above list are corporate tax and personal income tax.


Personal Income Tax

In the U.S., a tax is imposed on income at the federal, state and local level. All natural persons are directly taxable. Taxable income = total income – allowable deductions. Taxable income or gross income is income earned or received from whatever source within a year. This includes:

  • Salaries,
  • Wages,
  • Tips,
  • Pensions,
  • Fees earned for services,
  • Price of goods sold,
  • Business income,
  • Gains on sale of property,
  • Rents received,
  • Interest and dividends received,
  • Alimony received, etc.

Gross income does not only apply to cash received, but includes all income realized in any form. It is reduced by adjustments and tax deductions. Allowable deductions are

classified as either (1) personal allowances or exemptions, or (2) business exemptions. Personal exemptions include items such as a home mortgage interest rate, state taxes, interest on municipal bonds, life insurance proceeds, gifts or inheritances, value of employee benefits, and contributions to charities. A taxpayer may claim a flat rate exemption. For example, in 2013, the amount was $3,900. Taxpayers are allowed one deduction for themselves and one deduction for each person they support.

Taxpayers generally file tax returns on behalf of self every year. A tax return computes the total income of the individual minus allowable deductions, to equate the taxable income, which the person may be taxed on. The marginal tax rate fluctuates based on a few factors: whether the taxpayer is single, married and filing jointly, married and filing separately, or head of the household; what the taxpayer’s income is for that year. The taxpayer is then put into the applicable tax bracket. For example, in 2013, a single taxpayer making $40,000 for that year would fall into the 25% tax bracket; whereas a couple filing jointly making $40,000 for that year would fall into the 15% tax bracket. Here is an example of a tax computation:


Single taxpayer, no children, under 65, taking standard deduction: $40,000 gross income - $6,100 standard deduction - $3,900 personal exemption = $30,000 taxable income.

It is common practice in the U.S. for an individual, especially one with a complicated estate, to hire a registered CPA to help file their taxes on their behalf.


Corporate Tax

Federal tax rates on corporate taxable income vary between 15 and 35%. Like individuals, corporations must file tax returns every year and they must make quarterly estimated tax payments. Certain transactions that a corporation makes are not taxable, such as mergers, acquisitions, and liquidations. If a corporation does business internationally, they may be subject to foreign income taxes, and in some cases are granted a foreign tax credit for these taxes, which helps mitigate the potential for double taxation. There are three categories of corporations that have differing tax structures and it is important for the entrepreneur to classify his business according to one of these standards and realize the tax implications that it has.

C-Corporations pay tax at corporate rates AND the shareholders pay dividend tax rates. This is a concept known as double taxation. Losses in this type of corporation never pass through the corporation as tax benefits for the shareholders.

S-Corporations avoid double taxation and are on a pass through system, whereby the earnings of the company are taxed to the shareholders even when not distributed through dividends. Entity itself pays no tax on the income. In addition, an S-corporation may qualify for a lower tax rate on the dividends paid out. A corporation may elect “S Status” by the following requirements:

  • Must have under 100 shareholders
  • Undercapitalization
  • Cannot have another corporation be a shareholder
  • Cannot have a partnership as a shareholder
  • Cannot have a non-resident alien as a shareholder
  • Cannot have certain trusts as a shareholder
  • Cannot have more than one class of stock – must be common stock (provides a vote and distribution rights)

Partnerships
avoid double taxation because the partnership itself is not taxed, however, its partners are taxed on their shares of partnership income.


Attorneys in the United States do not typically provide tax advice unless they are specifically tax attorneys or registered CPAs. A company will want to employ both an attorney and a CPA, as the two professions, although in the same business field, are not mutually exclusive. It is common practice in the U.S. to have a CPA prepare both corporate and personal income taxes each year before the applicable deadlines. These deadlines include:

  • March 17: deadline for filing corporation or S-corporation return
  • April 15: deadline for filing personal, partnership or estates/trusts tax returns.

Taxes are also assessed at the state, county and local levels, with similar structures to

those discussed above. An aspiring entrepreneur in the U.S. should consult a CPA or tax attorney to determine all the necessary tax payments for his area.

SOCIAL INSURANCE SYSTEM

The U.S. provides a number of social benefits to citizens that can be tied to employment status. Often, both an employer and an employee must contribute tax payments to the systems in order for benefits to be available when they are needed.

  • Social Security
  • Health benefits, such as Medicare
Social Security is a federal system run by the U.S. Social Security Administration (SSA). Social Security encompasses a series of welfare programs that are funded by the collection of FICA and SECA, two different taxes collected and paid by employers. After contributing to the system through the collection of taxes, citizens receive payments after reaching a particular age, based on when the individual was born – the current range includes those between 65 and 67 years old.


Medicare is also a federal insurance program that guarantees healthcare for those who have paid into the system. Its protections are generally available to permanent legal residents of the United States for five years who are over age 65. Administered by a division of the Department of Health and Human Services, Medicare was amended greatly by the Affordable Care Act of 2010 and is largely funded by payroll taxes levied on both employers and employees. Some individual states also have their own healthcare insurance systems, whose regulations and taxes vary from state to state.

Private employers may also provide social or insurance benefits:

  • Pensions
  • Added healthcare, such as dental or vision plans
  • Disability
  • Worker’s compensation
  • Maternity/paternity leave
Most of these systems are administered via private contracts between employers and employees as well as private insurance companies. As such, the rules and regulations vary greatly depending upon location, size of employer and other factors. Individuals looking to start a company in the U.S. should consult with an experienced employee benefits attorney to assist in setting up the proper systems and protocols.

RESOLVING COMMERCIAL DISPUTES IN U.S.

As in Poland, two primary vehicles exist to resolve disputes between commercial entities: litigation and alternative dispute resolution, including settlement, mediation and arbitration


Litigation

Litigation can occur in any one of a number of settings, depending upon what happened, where it happened, and who it involved. Cases can arise over federal (national), state, or local (county, city) law. Additionally, litigation is generally divided into civil and criminal categories. Civil disputes involve a plaintiff and defendant who are both private parties, where the outcome of the case will often be some award of money (“damages”) and/or an order to act or cease acting in a particular way (“injunction”). Criminal disputes, conversely, involve the government prosecuting an individual defendant for a particular act; if found guilty, the defendant may face monetary fines and imprisonment. The same action can give rise to both civil and criminal liability. However, commercial disputes in the U.S. will generally fall into the civil category.

Similar to the court system in Poland, U.S. courts are adversarial. Each party is typically represented by an attorney, who argue in front of a judge and sometimes a jury of 12 members of the public.

Before the parties get to the point of arguing in front of the judge and jury, however, a long set of procedural requirements allow the parties to exchange information such that they can fully dispose of all of the relevant issues once they get to court. This process, called “discovery,” requires the parties to request relevant documents, ask questions (“interrogatories”) designed to elicit information that relates to the incident in dispute, and interview both their own witnesses and the other party’s witnesses (“depositions”) in an attempt to put all material information on the record. Once the discovery process takes place, the parties’ attorneys then draft legal arguments based on the facts gathered in discovery. Finally, the attorneys for each party argue the facts and law in front of the judge or jury, who then decide who is entitled to win the case and what the winning party will receive. This process is known as a “trial” and takes place in “trial courts.”

If a party disagrees with the outcome in the case, it may appeal to a higher court, usually called an “appellate court,” to reexamine the issues. The parties do not repeat the discovery process; instead, the appellate judge merely reviews the facts on the record to determine if the trial judge made a reasonable decision.

If a party still disagrees with the appellate outcome, it can petition the highest court, often called the “supreme court,” to hear the case. The supreme court is the final arbiter, and its decision is final.

Both state courts and the federal court system primarily use this three-tiered structure; business disputes will often begin in state court, but they can be removed to federal court when the parties to the case come from different states or different countries.


Alternative Dispute Resolution (ADR)

By far the most common non-litigation dispute resolution mechanism in the U.S. is settlement. The parties may settle at any time, and U.S. courts highly encourage settlement. A settlement is an agreement among the parties to end the court proceedings, select an appropriate outcome – such as a monetary payment that is less than what full damages might be – and cut off any rights to pursue litigation over the same matter in the future. Settlement is beneficial to parties who wish to achieve a result more quickly and who wish to save on legal fees for litigation, which can take years of time and cost significant amounts of money. In the majority of commercial cases, a court does not have to approve a settlement.

Two other forms of ADR exist: mediation and arbitration.

Mediation is a voluntary system where the parties sit down in an informal session with a neutral third party to try to sort out issues in the case and come to a settlement. It may be ordered by the court in certain circumstances, in which case the parties must resort to mediation. However, the parties do not have to agree to the mediated outcome if they do not feel it is appropriate or beneficial, and may instead choose to re-engage in litigation.

To engage in mediation, the parties must first select a neutral mediator, or request that the court appoint one. Limited discovery may take place so that the material issues and information are available to the parties and the mediator. Generally, all information and statements made during the course of mediation are not admissible in court, should the case end up back in litigation. The results of mediation are confidential, and the mediator may not be called as a witness in any later trial.

The key to mediation is that it is fully voluntary and geared towards finding common ground and solutions for the parties. When effective, it can save significant time and money and resolve disputes more quickly. However, the parties must acknowledge and accept the fact that they will not receive everything they wish and must instead compromise to terminate the case.

Arbitration is another out-of-court ADR device that is more formal than mediation: the parties each proffer their arguments to a neutral arbitrator, who then decides the case in lieu of a judge. Like mediation, the parties must agree to arbitrate; however, unlike mediation, the parties must accept the arbitrator’s decision as final and binding. The procedures to establish information are very similar to mediation, and as always the parties may settle the matter independently at any time.

INVESTMENTS IN SECURITIES AND BONDS

Investments in Securities, Bonds

A bond is a form of debt, like a loan. The person who buys the bond loans their money to a company, city, or the government, with a promise from that organization to pay back their money in full plus regular interest payments. For example, a city may raise money by selling bonds to fix its roads and infrastructure. Some bonds are considered a safe investment in the United States because they provide a steady stream of income. However, not all bonds are risk-free, and some are considered categorically uncertain and unpredictable.


Here are some key terms and definitions entrepreneurs should know when discussing bonds:

  • Investor: person who loans their money and receives a bond · Principal: amount loaned or amount the corporation or government will pay you back for your investment in the bond
  • Maturity date: date corporation or government will pay you back for your investment in the bond
  • Coupon: interest on the bond
  • Credit rating: a grade assigned to a bond to indicate how risky it is
  • Debentures: an unsecured bond not backed by collateral
All bonds are categorized according to their credit quality and are deemed either investment grade or non-investment grade. Below are four common categories of bonds.


The riskiest bonds are called high-yield, non-investment grade or junk bonds. These types of fixed-income instruments occur when a less credit-worthy issuer pays a higher yield, or interest rate. These types of bonds have appeal because they can offer a much higher yield. However, the investor must take into account that they may lose their whole investment. Companies that issue these bonds have less-than-stellar credit ratings.

The safest and virtually risk-free bonds are those issued by the U.S. Treasury. U.S. Treasury Securities are obligations that are issued and backed by the full faith and credit of the United States government. They have proven to be one of the most popular investments in the United States because of the government’s guarantee that the buyer will not lose money. They combine a guaranteed fixed rate of return with an inflation adjustment, so that the buyer will never lose purchasing power if prices rise. There are three different types of securities:

  • Bonds: have maturities greater than 10 years
  • Notes: have maturities of two to ten years
  • Bills: have maturities of one year or less.
Bonds.They are considered to have low credit and default risk, and can therefore generally offer lower yields relative to other bonds with the same maturity. Investors in these types of bonds receive interest payments, known as coupons, on their investment. The coupon rate is fixed at the time of issuance and is paid every six months. Interest payments are exempt from local and state taxes (although not from Federal Income taxes). These types of bonds cannot be redeemed before maturity and do not have call provisions.

Notes
. Issued in 2, 3, 5, and 10-year maturities. The Treasury also auctions these, with staggering dates depending on the maturity. All notes pay interest twice per year, and expire at par value.


Bills. Issued in three maturities: 91-day, 182-day, 364-day. The Treasury auctions the 91 and 182-day every Monday and the 364-day every 4 weeks on Thursdays. The interest rate is determined at each auction.

There are many different options to buy securities:

  • Through a broker,
  • Directly from the federal government (hold regular auctions that individual investors can participate in)
However, securities bought directly from the federal government cannot be redeemed prior to maturity.


U.S. Savings bonds are also issued by the federal government and backed by the full faith and credit guarantee. Like Treasuries, the interest earned on these bonds is subject to federal income tax, but not state and local taxes. However, unlike Treasury Bonds, savings bonds can be purchased for as little as $25. Only the person who is registered as having bought the savings bond can receive payment for it.

There are many different options to buy these securities:

  • From the U.S. Treasury (directly through their website, TreasuryDirect)
  • At banks and credit unions
  • Offered by employers through payroll deduction

These may not be bought and sold in the secondary market.


U.S. Government agencies issue Agency Securities to help support projects related to public policy. Public policy issues range from farming and small business to students and homeowners. For example, agency securities bond purchases go toward agencies, such as Fannie Mae, an organization that is the leading source of liquidity for housing in American and that helps ensure creditworthy borrowers can access mortgage credit in all market conditions.

Municipal Bonds
are a debt issued by a state, city or local government to finance governmental needs or special projects. Most of these bonds are exempt from federal, state, and local taxes. These types of bonds pay a specified amount of interest and return the principal to the investor on a specific maturity date. Most are sold in increments of $5,000 and range from short term (2-5 years) to long term (30 years). These tend to be more sensitive to supply and demand forces because sometimes they are traded actively, while other times they remain stagnant. Be sure to research and enter this market with care because there is fierce competition and many changing factors. No two municipal bonds are the same.

Corporate Bonds
are bonds issued by corporations to help them expand, cover expenses, and/or finance other activities. These types of bonds are fully taxable and usually pay a higher rate of interest than government bonds. The interest rates are usually set when the bond is issued. The investor does not receive any ownership rights in the corporation when they purchase its corporate bonds. There are many types of corporate bonds and investors have a wide range of choices regarding maturity dates (varying between 1-30 years). Most corporate bonds are traded on the over-the-counter market, which is decentralized, with bond dealers and brokers trading with each other around the United States over the phone or electronically.

If you are considering entering into the world of bond investments, be sure to begin with the selection of an investment professional with a proven track record.

INVESTMENT IN SHARES

Investment in Shares

In the United States, a person can invest in a company by purchasing a share of that company’s stock. Shareholders are a company’s owners, when a company’s stock is traded publicly. A person who buys this stock is known as a shareholder or stockholder. Shareholders are entitled to the following rights and privileges:

  • Not personally liable for the company’s debts and other obligations
  • Able to vote on corporate matters, such as who sits on the board of directors and whether a proposed merger should go through
  • Inspect the company’s books and records · Sue the company for misdeeds of the directors and officers
  • Amend the corporate bylaws
  • If the company liquidates, have a right to a share of the proceeds
  • Attendance at annual meeting
A shareholder will benefit financially when the company they hold stock in is doing well. Holders have the right to trade their shares on the stock market, making stock a highly liquid investment.

Public trade


When a company decides that they want to sell their shares on the open market, they will issue securities through an initial public offering, or an IPO. The stock will then need to be traded on at least one American stock exchange (e.g., NASDAQ, New York Stock Exchange, Chicago Mercantile Exchange) or in the over-the-counter market (less centralized and regulated). Once public, the market determines the value of the entire company through daily trading.

Additionally, once public, a company must answer to its shareholders, which sometimes there are thousands. Most shareholders are institutional investors, however individuals are not precluded. Public companies are regulated by the stringent requirements of the Securities and Exchange Commission (SEC).

INVESTMENTS IN REAL ESTATE

While purchasing real estate in the U.S. abides by many standard theories of contract law, some special rules apply.

Two general categories of real estate exist: residential and commercial. Businesses in the U.S. may focus on purchasing, developing and/or constructing either category, or both.

One of the threshold issues when considering making an investment in real estate in the U.S. is “zoning.” Governmental entities can ensure that particular types of real estate must stay in certain geographic zones to ensure a safe or hospital environment. For instance, if an area zoned for single-family residences, a real estate investor may not knock down homes to build a factory. While it is possible to appeal to administrative agencies to change a zone or provide an exception, the prudent investor ensures that any real estate purchased may house the desired business.

No general laws exist allowing or preventing particular classes of people from buying real estate. However, a seller may demand documentation proving that the buyer has sufficient funding to be able to make all payments. This is because many real estate transactions involve large sums of money paid in installments, or secured by a mortgage through a bank or other lender. The seller can screen potential buyers so that it can receive the benefit of its bargain.

Once a property has been purchased, any construction must be approved by the correct governmental entities, which is often administered at the city or county level. In the U.S., real estate owners often work with general contractors and attorneys for construction projects. These professionals assist in procuring trained construction personnel, applying for the necessary licenses and permits, and executing any contracts necessary for the completion of the project. When working with construction professionals, it is wise to check whether the company or individual is licensed, bonded and insured; this way, should the project not be completed as planned, the real estate investor has fallbacks available to recoup lost funds.

In the U.S., many taxes apply to real estate investments. Real estate transfer taxes can be assessed at the municipal (city), county and state levels; for instance, a real estate investor in Chicago, Illinois, must pay transfer taxes to the City of Chicago, Cook County, and the State of Illinois. These entities may also assess annual property taxes, so an investor unfamiliar with the tax regime should retain an experienced accountant or real estate tax practitioner for assistance.

ALTERNATIVE INVESTMENTS

If an investor does not wish to invest in bonds or shares, there are a few other options for investment in the United States. A few other options include: derivatives, hedge funds, private capital, or commodities.

A derivative is a security with the price dependent upon an underlying asset, such as a category of commodities. The derivative is exchanged and changed independently of the underlying asset. Derivatives may be a future contract, option, or swap:
· Future contract: contract to buy or sell the underlying asset for a specific price at a pre-arranged time.
· Option: contract that gives the holder of the instrument the right to buy or sell the underlying asset at a pre-arranged price.
· Swap: exchanging one security for another to change the maturity, quality of issues or because investment objectives have changed.

Commodities
cover a broad range of real assets, including but not limited to: cattle, agricultural products (wheat and corn), energy, gold and silver, oil and coffee. These types of investments allow an investor to hedge against inflation and possible risks. Commodity investing carries a higher risk than other investments, however, if invested in at the right time in the market, the investor can receive a great return.

Case

David is a Polish entrepreneur. He wishes to move to America to begin a software business in Chicago, Illinois, quickly gaining a reputation as a “business incubator.” In order to comply with American law and ensure success, David will need to follow a sequence of requirements that will help him form and operate his company.

First, to begin his business venture, David will need to start and organize a company. This will include filing certain administrative documents, fulfilling tax obligations, and dealing with investment and employment issues.

David will need to decide what type of company he wants to pursue: a sole proprietorship, partnership, corporation, or limited liability company (LLC). David’s decision will depend on the particular situation and goals he wishes to achieve, but generally American companies are either corporations or LLCs. If David wishes to have more than 100 owners (shareholders) or multiple classes of ownership with different ownership rights, a corporation is better suited to his needs. If David’s company will have a simpler structure with fewer owners and consistent ownership rights, an LLC will provide favorable tax obligations while maintaining the protections from personal liability that corporations provide. David chooses to establish an LLC and contributes an initial capital of $100,000.

Formation requirements of an LLC vary from state to state; the fees, documents and filing order depend on which state the company is formed in, in David’s case, he will need to look closely at Illinois’ requirements. However, for the purpose of this case study, we will outline the general steps that David should take to establish his LLC. First, he will need to reserve the name of his company by filing Articles of Organization through the Secretary of State. Second, he must apply for a federal employer identification number (EIN), which is required for setting up a company bank account and corporate income tax filings. Third, if he is planning on selling goods, he will need to register through the state’s tax agency to collect sales tax. Fourth, he will need to register as an employer with the Unemployment Insurance Division at the state’s Labor Department. Fifth, he will need to determine whether his company will employ enough employees to get workers’ compensation and disability insurance. A business attorney with transactional experience can assist David with all of these steps.

At the same time, David will want to draft an operating agreement for the LLC. This document sets forth all the various regulations that will govern the company’s internal affairs, including how members acquire and transfer ownership, how the company’s finances will be handled, and what the company’s functions will be. It is good practice to prepare the Articles of Organization and operating agreement at around the same time, because many items will be addressed in both documents. For instance, David must decide whether he wishes to be the sole owner (known as a member for an LLC), or whether he should partner with other established businessmen and women (other members). If there will be multiple members, then David will want to name one member as the managing member, as that individual will then have authority to act on the LLC’s behalf to comply with legal requirements. David may also choose to have a manager, rather than a member, manage the LLC; this option makes sense if David plans on having passive investors, that is, owners of the company who do not perform everyday roles in the company. Nevertheless, both the Articles of Organization and operating agreement will address the management structure, so it makes sense to save time by preparing both at once. The operating agreement does not get filed with the Secretary of State, but it must be kept as part of the company’s records.

David noted for future reference that corporations have similar formation documents as LLCs, only they have different names. Instead of Articles of Organization and an operating agreement, corporations file Articles of Incorporation and draft bylaws. However, the functions of these documents are similar to their LLC counterparts.

Another important aspect of setting up a company is addressing tax concerns. In the U.S., many lawyers do not work on tax issues because of their complexity, so David chose to work both with his attorney and accountant in order to ensure everything is proper. Like individuals in the United States, corporate entities must file taxes every year on corporate taxable income with the government. The federal government will treat David’s LLC as an entity separate from its members and therefore, it will not be directly taxed. Instead, David will be responsible for paying the LLC’s taxes if he is the sole member of the LLC. David can elect to have the LLC taxed like a corporation or partnership, which then requires the corporate entity itself to pay income taxes, rather than David in his personal capacity. An accountant experienced in business matters is the best source of information for David on all tax questions.

No matter how the David chooses to treat his tax obligations, similar to Poland, an LLC helps to shield a member’s liability for the company. The members are protected from some or all liability for acts, claims, obligations, and debts of the LLC, as long as David and any other members do not commingle their personal funds with those of the company and actually treat the company as a separate entity. In rare cases, LLC members can be sued for “breaching the corporate veil” if they fail to operate the business correctly. David can protect himself by applying for an EIN and maintaining a separate bank account strictly for his business.

If David decides to invite business associates into the LLC to become members, they will contribute capital to the LLC in exchange for a membership interest. If this occurs after David has filed the company’s Articles of Organization, he can file Articles of Amendment for a small filing fee with the Secretary of State to record the change; any such additions will also be reflected on the company’s annual report, which is due to the Secretary of State in Illinois by the first day of the company’s anniversary month each year.

David will need to have a plan in place if he expects his business to grow rapidly and to the point where he would need to hire employees. He would need to comply with federal and Illinois regulations. He would need to draft sufficient and comprehensive employment contracts (discussed in Section III). In addition, David will have to determine whether the company will need to provide health insurance to its employees. An attorney experienced in employment matters is an excellent resource to comply with such requirements. If David decides that his LLC is thriving and can operate without his presence in the U.S. such that he wishes to go back to Poland to begin a new business venture, he has two options. First, he may withdraw from his LLC in Illinois. Generally, David would just need to provide written notice that he intends to withdraw, but needs to check the state law to make sure he is compliant with all requirements. If the withdrawal is authorized, David will probably be entitled to the return of his capital contribution of $100,000. On the other hand, the LLC may decide to pay David the fair market value of his membership interest. Unlike Poland, David cannot simply sell his membership in the company and walk away. Second, David may instead decide to dissolve the LLC when he moves back to Poland. In most states, when a sole member withdraws, the LLC legally dissolves; however, if the LLC has multiple members, the remaining members can operate the LLC as set forth in the operating agreement, and a current or new member must be named as the managing member. If an LLC dissolves, state law will require the wind-up of the business. This includes paying off remaining creditors, distributing remaining assets to members, and filing articles of dissolution.

These items are only a summary of the most important aspects of starting, running and shutting down a business in the U.S. While it may seem like a daunting task, David found that taking care of them in a timely manner when each item came up was far easier and less expensive than trying to fix them after something went wrong.

FORMS OF CONDUCTING BUSINESS

The first thing which any foreign investor should do is to choose the most suitable form of conducting business. This choice determines beared costs, owners’ liability and legal requirements which must be fulfilled, so it should be compatible with the type of activity and investors’ expectations.

In general Polish law establishes freedom of doing business. It generally means that everybody can set up and conduct any business activity on the territory of the country. However, there are some exceptions from this rule, both, as to the object and to the subject.


Forms of doing business in Poland can be divided into few categories:

  • individual business activity
  • commercial companies:
    • partnerships
    • corporations
  • branch offices and representative offices


According to Polish law, without any special permission, Americans are allowed to set up business and solely operate in the following forms:

  • Limited partnership (spółka komandytowa),
  • Limited joint-stock partnership (spółka komandytowo-akcyjna)
  • Limited liability company (spółka z ograniczoną odpowiedzialnością)
  • Joint-stock company (spółka akcyjna)

All of them are commercial companies. They are defined by polish law as for profit cooperation between at least two persons. The limited liability company and the joint stock company can be exceptions from this rule and may be established by a single entity upon certain conditions. Polish commercial companies are designed for various types of entrepreneurs, so the types most attractive for Americans, listed below, will be described separately. The advantages are various in every case – for example limited partnership is connected with preferential tax duties and companies limit liability of their owners.

Tax duties will be described separately with the whole tax system in Poland.



Limited partnership


This kind of partnership can be used to conduct various types of activity, regardless from scale. There are two types of partners in limited partnership, which differ in terms of liability:

  • General partners – bear unlimited liability for partnership’s obligations; according to Polish law, there must be at least one general partner in limited partnership
  • Limited partners – bear liability limited to certain amount stated in articles of association (commendam sum). There are no requirements concerning the amount of initial payments paid by the partners. They can regulate it freely in the articles of association. The rule is that the partnership is represented by the general partners.

Limited joint-stock partnership



Interesting form of conducting business. It can be described as a mix of limited partnership and corporation. Owners of the partnership can also be divided into two categories:

  • General partners – bear unlimited liability for partnership’s obligations; according to Polish law, there must be at least one general partner in limited joint-stock partnership
  • Shareholders – own shares issued by the company, they don’t bear any responsibility for company’s obligation Minimum amount of share capital is 50 000 PLN. Partnership is represented only by the general partners.

Limited liability company



The most popular form of conducting business in Poland. Minimum amount of share capital is 5 000 PLN, and minimum amount of 1 share is 50 PLN. The company has legal entity and shareholders don’t bear responsibility for its obligations, so their risk is limited to their contribution in the company.

This type of company can also be set up by sole shareholder provided that it is not another limited liability company.

Limited liability company can also be set up by filling appropriate form in internet. Details of this procedure will be described together with the presentation of procedures of registration other types of business activities in Poland.

There’s possibility to distinct the shareholders of the Limited liability company by granting privileged shares to the chosen ones. Privileges can concern e.g. following rights:

  • Higher amount of received dividend (max 1,5 dividend received by ordinary shareholders),
  • Multiple right to vote (max 3 votes from 1 share),
  • Right to be first in line to receive amount of contribution when the company goes into liquidation.
Limited liability company doesn’t give the opportunity to enter into the public market. Generally, this form should be chosen to conduct small or medium-size business, when the number of shareholders is limited and they want to have control of the company’s activity.


Joint-stock company


This kind of company is more complexed and formalized than the limited liability company. It’s also the only kind of company which allows entering on the stock market. Minimum amount of share capital in joint-stock company is 100 000 PLN and can be divided into shares which minimum value is 0,01 PLN.

There are also few types of privileged shares:

  • Granting higher amount of received dividend (max 1,5 dividend received by ordinary shareholders),
  • Granting multiple right to vote (max 2 votes from 1 share),
  • Granting right to be first in line to receive amount of input when the company goes into liquidation
Joint-stock company is useful to conduct a business for a large scale. From the shareholder’s point of view – it’s appropriate form when he’s not interested in managing the business activity and wants to confer it upon management board.

Joint-stock company also grants possibility to operate directly after drafting the articles of association, because Polish law grants company in organization legal and judicial capacity.



Off-the-shelf



There is possibility to purchase already formed, off-the-shelf company or partnership. There’s no difference from the legal point of view, whether partnership or company is set up personally by the entrepreneur, or bought from some other entity. Any partnership and corporation in Poland can be set up as off-the-shelf, so eventually there are the same possibilities for the entrepreneurs who decided to buy an off-the shelf.

SPECIFIC KINDS OF ACTIVITIES

Although Polish law states the rule of freedom of conducting business, there are some specific areas of activities, which are restricted for entities who meet special requirements. Generally, starting to operate in certain branches requires fulfilling some additional obligations after forming a business. Without it, conducting it would be illegal.

There are few categories of obligations which can be imposed on entrepreneurs

  • Concessions,
  • Licenses
  • Permissions
  • Registration of regulated activity.
Fulfilling every of obligations mentioned above empowers to conduct certain activity on the whole territory of Poland and without any time limitation.


Concessions

Concession is an administrative act issued by government body, which is empowered to granting it (concession authority). It’s the most demanding and severe kind of restriction which can be imposed on the entrepreneurs. This act authorizes the concession holder to conduct a precise business. Granting concessions is introduced to the activities which are very important because of national security or other important public interest.

Rules of conducting business activities, which require obtaining a concession, are usually very strictly regulated by the Polish law. Granting a concession is a result of fulfilling special requirements, and it is controlled by the concession authority. There’s also possibility to grant a concession on condition that the particular business will be conducted in some specific way, which is stated in the concession act.

Characteristic feature of the activities, which requires obtaining a concession, is thatthey can be limited and concession authority is allowed to deny granting a concession only because there are enough entities which already conduct certain activity. In case of limited number of concessions a tender is usually organized.


Conducting business activity after granting a concession remains under constant control of concession authority. If the entrepreneur fails to fulfill every obligation, concession can be withdrawn.

According to Economic Freedom Act, concession is required to conduct one of the following activities:

  • prospecting, exploration of hydrocarbon and solid mineral property covered by mining exploration or exploration of complex geological storage of carbon dioxide, extracting minerals from deposits, underground tank storage of substances, underground storage of waste and underground storage of carbon dioxide,
  • the production and sale of explosives, arms, ammunition and technology for military or police,
  • the production, processing, storage, transmission, distribution and trade of fuels and energy,
  • transfer of carbon dioxide in the geological storage,
  • the protection of persons and property,
  • distribution of radio and television programs, with the exception of programs that are distributed exclusively in the IT system that are not distributed terrestrial, satellite or cable networks,
  • air services,
  • conducting casinos.
Procedure of obtaining a concession is quite complexed and formalized. It’s worth to use some professional advice concerning its legal aspects. Considering the fact, that granting a

concession takes some time, there’s also possibility to obtain a promise of concession, which allows conducting activity earlier in the range stated in the promise.

According to Polish regulation, presented above, granting a concession is required, among others, to conduct activity extraction of shale gas. More about shale gas in Poland is available in the article:

SHALE GAS IN POLAND

Licenses

License is less common form of permits. It imposes fewer requirements than a concession, but also involves the fulfillment of some specified conditions. Also in this case fulfilling the requirements remains under control of empowered entities.

Licenses do not get the person who has been convicted of an offense. For example following areas of activities requires obtaining a license:

  • road transport,
  • railway transport.
Permissions


Permissions are similar form to licenses and are less restrictive than concessions. It should be understood as authorization to perform the certain activity in the manner and under the conditions stated by law.

The main difference between the permission and the concession is that if the entrepreneur meets the requirements set up by law, the authorized entity cannot refuse granting permission.

Obtaining permission is required e.g. in the following kinds of business activities:

  • Wholesale and retail sale of alcoholic beverages,
  • Conducting games of chance, betting, raffle games, promotional games and slot machine games,
  • Economic activity in special economic zones,
  • Production and distribution of license plates for vehicles
  • Brokerage - keeping the stock exchange and OTC market
  • Activities of pension funds, making and executing the business of insurance, reinsurance and insurance mediation
  • Undertaking and performing banking activities
  • Exercise of the insurance business
  • Insurance intermediation - is done by insurance agents or insurance brokers
  • Authorization in the field of excise goods
  • The activities of the investment fund
Registration of regulated activity


Registration can be imposed on the entrepreneurs according to the Polish law. Regulated activities which should be registered have to be conducted in accordance with the rules stated by Polish law. Entrepreneurs which are willing to operate in this certain areas have to inform the authorities by registering the activity.

The entrepreneur who wants to conduct regulated activity has to make a statement that he fulfills every obligations imposed by law. It is a ground for registration and can be controlled later by the empowered authorities.

Registration is required to conduct e.g. the following types of activities:

  • providing tourist services including hunting by foreigners on Polish territory and hunting abroad,
  • conducting vehicle inspection stations, conducting driver training center, center of training driving techniques and to conduct psychological laboratory,
  • organization of tourist events and mediating on behalf of clients in concluding contracts for the supply of tourism services,
  • detective services,
  • conducting training center for drivers engaged in the carriage by road
  • activities in the conduct of ADR courses, courses for experts ADN courses for advisers,
  • activity of foreign exchange offices,
  • production or bottling of wine,
  • active in the production or bottling of spirits.

METHODS OF ESTABLISHING COOPERATION WITH OTHER ENTITIES

Conducting business activity usually demands cooperation with other entities, whether it is hiring employees, outsourcing tasks. From the legal point of view, there are many forms which allow doing that. It can be useful to gain some knowledge about the most significant ones in Poland:

  • labor relations,
  • alternative legal forms of establishing cooperation with employees,
  • legal forms of concluding contracts in Poland.

Labor relations

Polish law very strictly regulates labor relations. There are rules concerning drafting an agreement, treating employees, minimum wages and salaries, work time and holidays, liability of the employees, and the social insurances which employer is obliged to provide.

There are also special tax duties for the employers.

Traditional way to establish a labor relationship is the employment contract. Polish law distinguish few types of this contracts:

  • Contract for an indefinite period,
  • Fixed-term contract,
  • Contract for a trial period,
  • Contract for the particular job,
  • Replacement contract,
  • Cooperative contract.
The employment contract should be concluded or confirmed in writing. In Poland operates the National Labor Inspectorate. This is the authority which supervises and controls compliance with of labor law in workplaces, in particular rules and principles of occupational health and safety, and employment regulations.


More information about the labor law you can find on the following website:


Alternative legal forms of establishing cooperation
with employees

Of course there is a possibility to cooperate with workforce in other ways. The term “alternative forms of employment” refers to forms of employment other than the standard work carried out on full-time under a contract concluded for an indefinite period of full-time. Alternative forms of employment can be more flexible in terms of time and place of work, forms of employment, form relationships employee and the employer, salary and scope of work.

Most common alternative legal forms are following:

  • service contract,
  • contract of specific work,
  • self-employment
  • teleworking,
  • work-sharing,
  • freelancing,
  • outsourcing.
There are other obligations concerning taxes and insurances in these cases. Also, a lot of the obligations beared by the employer according to labor law are not applicable.Service contracts and contracts of specific work are common type of agreements, regulated by civil private law. The main difference between them is, that contract of specific work should be ended with creating some material item, and service contracts are just about providing some kind of services.

Self-employment can be connected with the form of doing business. The person which providing some services acts as sole proprietorship and the entities are drafting agreement between two entrepreneurs.

All of the forms mentioned above have a lot of advantages. Usually, there is less fiscal burden in comparison to the employment contract. In case of contract of specific work, thereis also no obligation to pay insurance allowances.

Self-employed people are responsible for their taxes and insurances itself. There is no obligation for the people for who they are providing services to ensure them any public benefits.

Teleworking is basically a form of job organization, not separate contract. It assumes providing work by means of electronic communication. In Poland, the performance of the work in this form is subject to labor law. Teleworking requires well-defined method of accounting for working hours. Work-sharing is a flexible form of employment involving the periodic reduction of working time and wages of employees. The result is, that a one job is occupied by a few employees Reducing the number of hours of work and the level of wages occurs usually as a consequence of an agreement between the employer and the trade unions or the employees themselves. Work-sharing is most often used in situations in which the deterioration of financial health may result in loss of employment.

Legal forms of concluding contracts in Poland

It’s also useful to know some basic information about the procedure of drafting contracts, because it’s practically a daily part of conducting a business. According to Polish law, there are four ways to conclude an agreement:

  • offer and its acceptance,
  • auction,
  • tender,
  • negotiations.
An offer can be defined as binding proposal of concluding an agreement on specified provisions. Once it is accepted by the other party, the contract is made and there is a possibility to demand its execution by the parties. There are some modifications in case of entrepreneurs – when they are in permanent business dealings, the agreement may be concluded by tacit acceptance.


An auction and a tender are very similar ways of concluding an agreement. Both of them require making offers (called bids) by the interested entities. In case of auction, the agreement will be concluded with the entity, which offered the best price. Auction is public, and the offers which are made are known to other participants.

The bids made during the tender are secret and the organizer can choose the offer considering not only the price. The requirements should be announced earlier. Common practice is also obliging participants to make initial payment which allows them to take part in tender.

During the negotiations, parties of the contract mutually negotiate and agree upon its provisions. Idea of this way of concluding agreement is to create contract which will meet the expectations of both sides.

Moreabout them you can find on the website below:

BUSINESS REGISTRATION IN POLAND

Procedure of business registration in Poland (mentioned above as available to conduct by Americans without limitations) can be divided into few steps.

  • At the beginning Company/partnership agreement must be drafted by notary public. When it comes to the notarial fees for the notarial deed on establishing the company/partnership – this cost may vary, and depends on the amount of the share capital,
  • Next thing is depositing amount of share capital in the company,
  • Next step is registration in the National Court Register. It must be done in registration court which have jurisdiction over the place where is located the registered office of the company. The total cost of registration is 600 PLN. It is usually done simultaneously with submission to the court application for granting tax identification number (NIP) and statistical number (REGON).
  • Tax identification number allows for registration with the tax office for the purpose of VAT. This can be done simultaneously with obtaining tax identification number. The cost is now approximately 170 PLN. Soon, after introduction of the amendment, this fee is going to be liquidated.
  • When company is registered, an amending motion needs to be filed to update the company data with the Statistical Office,
  • If the entity decides to hire first employee, it has to register to local social insurance office, within 7 days from the date of commencing the employment.
Procedure described above is an ordinary way to set up the partnership or the company.

In case of companies, there is, however, also possibility to operate as company in organization. It means, that business activity can be commenced before the registration in National Court Register. It requires obtaining tax identification number and statistical number earlier than in case of described above.

Procedure of registration Limited Liability Company can also be performed on-line. In this case, the articles of association shall are drafted in standardized form of contract. The advantage is, that there’s no need to pay notarial fee. To sign the documents is required only electronic signature. However, entrepreneurs doesn’t use this form often, because there’s no possibility to adapt precisely the articles of association to the needs of shareholders.

The system allowing registration of a limited liability company using the standard contract is available on the website of the Ministry of Justice at: EMS. System is available to use for Polish citizens and foreigners.

The person who will use the system, must register an account in the first place.

By creating an account on the system a person indicates their data and authenticates them with your username and password.

The motion of registration, the memorandum and other necessary documents are created directly in the system and sent to the court.

The steps of this procedure are following:

  • Registration of the users,
  • Conclusion of the articles of association and the submission of the application:
    • filling out the forms via internet,
    • verification of the documents and submission to the court registry.
  • Recognition of motion for entry in the National Court Register by the registration court,
  • After the entry in the National Court Register:
    • submission to the registry court a motion for admission of the management board members’ patterns of signatures, which were submitted to the court or notarized.
    • the contributions of the shareholders must be made no later than 7 days from the date of registration of the company in the National Court Register (unless it was done at the stage of registration),
    • registration of a company in the tax office,
    • when the company obtains number REGON and NIP, complement an entry in the National Court Register with these numbers,
    • paying the civil law activities tax.
Registration in the National Court Register is obligatory also in case, when entity wants

to set up a branch office in Poland.

Separate procedure is provided for the registration of the sole business activity.

DUTIES OF ACCOUNTING AND TAXES ACCOUNTING

The purpose of accounting is to reliably and clearly present entity’s financial position and profit or loss. Obligations of an entrepreneur in accounting can be divided into three groups:

  • Bookkeeping and data protection contained in the books of account;
  • Methods for inventory and valuation of assets and liabilities during the financial year and at the end of it;
  • Reporting obligations
Polish law doesn’t impose obligation of conducting accounting books on every entrepreneurs. Chosen one can operate only on the basis of tax revenue and expense ledger for the tax purposes (the entities who decided to pay income tax in simplified forms are not obliged even to this). This form is much simpler than traditional accounting and requires fewer formalities. Such possibility, however, have only following entities:
  • natural persons, civil partnerships, general partnerships and professional partnerships,
  • persons performing activities on the basis of agency agreements and service agreements,
  • persons conducting special agricultural production if they notified their intention to conduct these books,
  • clergy, who resigned to pay a flat-rate income tax.
Using this method requires also fulfilling one more condition. Entities’ net revenues from sales of goods, products and financial operations for the previous year must be less than the equivalent in Polish currency of 1 200 000 EURO. However, they still have possibility to keep accounting books. In this case, they must report that to proper fiscal authority.


Limited partnerships, limited joint-stock partnerships, and companies always must keep accounting books commonly called a "full accounting" and their accounting has to be carried out according with the Polish Accounting Act. After the end of the year they are obliged to prepare financial statements, which includes a profit and loss account, balance sheet and notes. All these documents shall be submitted to the tax office and registry court. Entities whose financial statements are audited and disclosed, must publish it in the National Court Register of Polish Official Journal - Court and Economic Monitor.


Entrepreneurs are obliged to take care for proper storage of accounting documentation.

Preparing the financial statements is primary duty of the entities. However, there may also be imposed on them other similar duties. In particular, it refers to reports prepared for the Main Statistical Office or the Polish National Bank.


Taxes

General information

In 2013, Poland and USA signed contract, which states rules concerning avoiding double-taxation. The contract is applicable for following taxes:

  • personal income tax and corporate income tax (Polish taxes)
  • federal income taxes and taxes imposed on private foundations (American taxes).
Full text of the agreement is available on: CONVENTION


There is no agreement concerning avoiding double-taxation between Poland and USA in case of remaining taxes.

Direct taxes:

  • personal income tax (PIT),
  • corporate income tax (CIT),
  • tax on inheritance and donations,
  • civil law activities tax,
  • agricultural tax,
  • forest tax,
  • real estate tax
  • tax on transport means,
  • tonnage tax,
  • tax on mineral extraction.
Indirect taxes:
  • value added tax (VAT),
  • excise tax,
  • gaming tax.

For the entrepreneurs, the most important of them are the most general ones: income taxes, civil law activities tax and value added tax. They are briefly described below.


Personal Income Tax

Income tax is a personal tax, which means that the taxable person is any natural person. Natural persons, who reside in the territory of Poland, bear unlimited tax obligation. This means that individuals are subject to tax in Poland on the total earned income, both domestic and foreign, regardless ofthe location of sources of income.

The subject of taxation are all kinds of income, with a few exceptions. These are, therefore, any income defined as the excess of total revenue over the cost of obtaining in the tax year, except from incomes expressly exempted from taxation. Loss of sources of income is deductible from income earned in the next five fiscal years from the same source that brought loss. The statute includes examples of taxable income, which includes:

  • business relationship employment,
  • activity carried out personally,
  • non-agricultural economic activities,
  • special agricultural production,
  • lease, sublease, tenancy, sub tenancy etc.,
  • equity and property rights,
  • a sale of the property,
  • other sources.
Revenues are received or placed at the disposal of the taxpayer during the calendar year money and the monetary values and the value of cash received benefits in nature.

Deductible expenses are all expenses incurred to generate revenue or sustaining or securing sources of income, with the exceptions mentioned in the statute.

The taxable amount of personal income tax is the sum of income from each source of revenue.

In Poland used are various kinds of tax reliefs. These are provided in the taxl aw exemptions, deductions and reductions, whose application reduces the taxable amount or the amount of tax.


Currentlyin Poland there are two tax rates of the personal income tax - 18% and 32% - PLN 85,5 k.


Tax purchasers are primarily employers. It means that they are obliged to pay tax advances of their employees. Also other entities can be tax purchasers. They are commonly obliges to pay some benefits. All these authorities are required during the whole year to calculate and deduct from the taxpayers’ salaries the advance payment of income tax and transferring these amounts to the account of the tax office.

Sole traders are obliged to pay their taxes themselves.

Entrepreneurs are obliged to possess tax revenue and expense ledger. It is an evidence of the bearded costs and received revenue, which is the basis for calculation of the taxable income.

In some cases, the legislator allows for collection of income tax in the simplified forms, involving omission of some parts of tax techniques or application of other method of calculating the tax. Simplified tax forms are generally more favorable than the income tax on general principles. The taxpayers have decreased duties of documenting their activities. The simplified forms in Poland are following:

  • Lump sum of registered revenues,
  • The tax card,
  • Lump sum on the income of the clergy.

Corporate
Income Tax

Taxpayers of the corporate income tax are:

  • legal persons and limited joint-stock partnership,
  • organizational units without legal personality, with the exception of remaining partnerships,
  • on certain conditions, also tax capital groups, i.e. groups of at least two commercial companies having legal personality which remain in capital ties.
Partnerships doesn’t have to pay corporate income tax. It makes them attractive from the point of taxes, because only partners bear obligation to pay personal income tax.

Taxable entities, established or possess management board in Poland, bear unlimited liability to tax on the total income and regardless of place of its achievement. Limited tax liability, concerning income generated only in Poland, is imposed on taxpayers whose registered office or management board are outside the Polish territory.

In order to determine the taxable income, from the revenue shall be reduced by the deductible expenses. For the purpose of corporate income tax, revenue is defined as all money received by the taxpayer, the monetary values, value of benefits received free of charge, the value of income in nature, the value of canceled and expired commitments and the value of returned debts. Deductible expenses are the same as in case of personal income tax.

If a legal person suffers a loss, it can cover it with the income earned in the next five fiscal years, provided that amount of impairment may not exceed 50% of the loss.

There are a lot of tax exemptions on the grounds of corporate income tax. They have both, subjective and objective character.

The taxable amount is achieved by a legal person income (revenue – deductible expenses) in the tax year after deductions (a form of tax relief, such as donations for public purposes).

The basic tax rate is currently 19% of the taxable amount. Preferential rules of taxation apply in the case of separate rules for the taxation of certain economic activities.

Taxpayers are obliged to self-calculate due monthly tax advances and the tax itself. They are also obliged without a call for it to submit the declaration of monthly amount of income (loss) and make an advance payment (tax payable on the income earned from the beginning of the fiscal year - the total advances due for the previous month).

Taxpayers commencing business activity or small taxpayers (their income from sales, including VAT does not exceed 1 200 000 €) can choose quarterly accounting method. They also have possibility to pay the advances in simplified form in the amount of 1/12 of the tax due for the previous year.

After the end of the tax year the taxable person is obliged to submit a tax return of the income and pay the tax due or the difference between the tax due and the sum paid in advance.


Civil
law activities tax

Subject to civil law activities tax are following operations listed in the statute:

  • a contract of sale and exchange of goods and property rights,
  • the loan agreement of money or things designated only to species,
  • a donation agreement - in the part concerning the acquisition by the recipient debts, burdens or obligations of the donor,
  • a contract for life,
  • a contract of inheritance division and contracts for the abolition of joint ownership - in the part on reimbursements or subsidies,
  • the establishment of a mortgage,
  • establishing a payable usufruct, including improper, and payable easements,
  • the irregular deposit contract,
  • articles of association;
Obligation of paying tax arises also on certain conditions in case of change of contracts mentioned above, or issuing the court verdict, which leads to creation the same consequences.


Also in case of this tax, there are a lot of tax exemptions. Most important of them for the entrepreneurs is exempting the contracts mentioned above, when one of its parties is obliged to pay VAT.

The taxable amount is the market value of carried out transactions. The rates are different for particular activities. They vary, from 0,5% to 2%.


Value
added tax

This tax are obliged to pay a natural persons, legal persons or organizational units without legal personality, conducting any economic activity independently, regardless of the objectives and results. There are also few specific groups of taxpayers.

Taxpayers are also legal persons or organizational units without legal personality and non-taxable, natural persons, making the occasional intra-Community supply of new means of transport.

A taxpayer who does not possess a business headquarters or a permanent place of business in the territory of a Member State of the European Union, and shall be subject to registration as an active VAT payer, shall appoint a tax representative in Poland.

Tax must be paid from following activities:

  • supply of goods in the country,
  • supply of services in the country,
  • export and import of goods,
  • intra-Community supply goods or services,
  • intra-Community acquisition goods or services,
  • commodities in the event of liquidation of the company.
It is important that non-taxable are sale of an enterprise or an organized part of the enterprise and the activities that cannot be the subject of a legally effective contract.

The taxable amount is determined by the kind of taxed activity. It can be value of turnover, value of commodities or services, cost of providing services, and others.

Currently, the most commonly used tax rate are 23% (basic), 8%, 5%, 0%. The 23% rate is a general VAT rate, applicable unless legislator stated otherwise. The rate of 0% is the actual lack of taxation, with maintaining the right to deduct input tax, relating to those activities. Sales taxed at 0% remains the taxable sales, despite the lack of actual fiscal burden.

VAT is hidden in the price of products. Taxpayers add its value to the price of sold commodities. In the end, tax is actually paid by the consumers.

Construction of the VAT in Poland is very complicated. From basic rules there have been introduced many exceptions. It is worth using consulting a specialized advisor in order to properly fulfill the obligations.

THE SOCIAL AND HEALTH INSURANCE SYSTEM

The social security system in Poland covers, inter alia, employees, persons working on the basis of mandate and the entrepreneurs.

In Poland there are the following types of social insurance (due to the range of benefits):

  • pension,
  • disability allowance – there are few types of it:
    • disability pension,
    • training pension,
    • family allowance,
  • sickness and maternity allowance,
  • accident allowance.
The calculation of social insurance premiums and registration of insured persons is quite complicated. For the entrepreneurs, the substantial meaning have the rules regulating obligations of the employers.
The employer is obliged to pay insurance premiums on social security, health insurance and the labor fund for employees (insured persons).



Employers are required to report to insurance authorities as a payer within 7 days from:

  • date of employing the first worker or a date of commencement legal relationship which justifies the inclusion the first person of insurance,
  • date of commencement of insurance liability for insured only obliged to pay contributions for their own insurance or insurance premiums of their collaborators.
National entity dedicated to the collection of contributions to common social insurance and health insurance of the citizens and distribution of the benefits is the Social Insurance Institution. More information about social security system in Poland you can find on the following link:
ZUS THE SOCIAL INSURANCE INSTITUTION

RESOLVING COMMERCIAL DISPUTES IN POLAND

In Poland, as well as in Western countries, there are two groups of procedures designed to resolve disputes between business entities:

  • classic litigation procedure,
  • alternative dispute resolutions.

Litigation procedure

Court litigation continues to play the biggest role in resolving disputes in Poland. Court proceedings is collective name for proceedings, which take place before independent courts, unlike the proceedings which take place before, for example, proceedings before public administration authorities. The judicial process in Poland is adversarial. The parties enjoy the same rights, and the judge, based on accumulated during process’ duration evidences is required to issue a verdict.


In Poland can be distinguished the following types of judicial proceedings:

  • civil proceedings,
  • criminal proceedings,
  • the proceedings of administrative courts.
Disputes between the entrepreneurs, concerning their business relationships, are resolved in civil proceedings. Currently in Poland there are no special courts that deal with civil lawsuits. The ordinary courts and the Supreme Court resolve civil cases unless they fall within the jurisdiction of special courts. In Poland, there is following hierarchy of ordinary courts:
  • district courts,
  • regional courts,
  • appeal courts.
The process is initiated by filing the lawsuit to the appropriate court. In Poland is applied a dual instance system. It means, that the verdict of the court of first instance can be controlled and even reversed by the court of second instance.


The rule is, that the court of first instance is district court. In certain cases, it can be also regional court.

In certain cases, the Supreme Court may examine the matter resolved already by the court of second instance. The Supreme Court’s verdicts are not binding for the ordinary courts, they are applied only in cases which they concern. In practice they are guidelines for ordinary courts, how to resolve certain problems.

The disputes between the entrepreneurs and the public administration authorities are resolving in the proceedings of administrative courts.

Alternative dispute resolutions

There are few factors, which led to the development ADRs in Poland. Legal process is expensive and requires the payment of a number of charges, while ADRs are designed to be cheaper. They are also constructed by the parties themselves, allowing you to speed up the proceedings. This possibility does not create legal proceedings, which is much longer in comparison with ADRs.

The arbitration proceedings does not need to be conducted in two instances. In addition, the role of the court is to resolve the dispute between the parties. The result satisfies only one of the parties. ADRs, in assumption, are designed to make both parties winners.

ADRs in Poland are not developed as well as in the USA. They also are not used as often by the entrepreneurs. The most common kinds of alternative dispute resolutions in Poland are:

  • mediation,
  • arbitrage.
Both of them are regulated by the statute. Any other methods of ADR in Poland cannot replace the court verdict and would have only character of ordinary civil agreement.

Mediation

Mediation is a method of dispute resolution in which a third party (the mediator) assists the parties in communication, identifying interests and issues which need to be discussed, and reaching a consensus. Unlike the court, the mediator does not possess any governmental authority. The parties are reaching the consensus by themselves. Mediator only helps and controls the proceedings. He cannot propose the final content of the agreement. He may help to write it, but this help may have only technical character.



This process of mediation in principle is voluntary, confidential and informal. If, however, the result of mediation has to replace the court verdict, it should be conducted under the rules stated by the law. In this case, it should meet the following conditions:

  • The mediation has to be confidential,
  • The mediation has to be voluntary,
  • The settlement reached before a mediator must be enforceable by execution,
  • The mediation has to cause interruption of the limitation period.
Mediation can be conducted outside the court. In this case, the parties present to the court the settlement for approval. There is also possibility to order to the parties conducting the mediation by the court itself. There is of course possibility to reach the settlement without court’s approval. Under Polish regulations, it is based on ordinary negotiations. This kind of settlement, however, cannot be enforceable by execution. In case of lack of final consensus between parties, they can only file a lawsuit to the court.

Arbitrage
Arbitration is a voluntary procedure of the settlement of disputes by an empowered third party, based on objectified standards. Parties have right of choice or consent to an arbitrator and limited impact on the rules which are ground of issuing a verdict.


Arbitration may be ad hoc, institutional and administered.

There are special arbitrage courts in Poland, with steady, appointed judges. Arbitrage courts can also operate based on infrastructure possessed by ordinary courts. In an ad hoc arbitration, each party usually selects its own arbitrator (or arbitrators), and then they appoint the presiding arbitrator. Ad hoc arbitrage can be conducted in the arbitrage court.

Submission of the dispute to arbitration requires the agreement of the parties. Arbitrage court resolves civil disputes subjected to it by the power of the arbitration clause. Verdicts issued by arbitrage courts, after their acceptance by the ordinary court, have the same legal effect as verdicts of ordinary courts.

Arbitrage court shall settle the dispute according to the law. However, if the parties expressly authorize it, it can settle the dispute in accordance with the general principles of law or equity.

In the case of existence of the arbitration agreement, a party may not evade from the submission of the dispute to be resolved by arbitration. It means, that a party cannot avoid execution of the arbitrage court, on the grounds of the claim, that it is not state court.

There’s, of course, always possibility to file a claim to the ordinary court, but in this case, the opponent has a right to demand settling the dispute by the arbitrage court.

In Poland, the biggest Arbitration Court is the Court by the Polish Economic Chamber in Warsaw.

INVESTMENTS IN BONDS

Please be informed that the aforementioned information on legal issues connected with investment in Poland is only an introduction. In a specific investment scenario especially with considerable degree of complexity, the investment should be made upon getting a legal advice.

Investment in bonds

A bond is a kind of security in which the issuer is the debtor bondholder and agrees to fulfill specific obligations to him. There are many legal terms concerning bonds. The most important of them are following:

  • The issuer of bonds - is an entity forest financing using bonds,
  • Bondholder – is an entity which bought the bond,
  • The nominal value of the bond - the amount of the loan granted by the bondholder to the bond issuer, which is repaid in definite term. From this amount is accrued interest on the bonds,
  • Redemption of bonds - repayment by the issuer the amount of the loan of the nominal value of the bonds increased of interest,
  • The redemption date - the period from the date of issue to the date of redemption,
  • The interest rate – kind of provision payable at a fixed period of time by the issuer to the holder of bonds in exchange for a granted loan,
  • The issue price - price of the bonds on the primary market,
  • Exchange rate of the bonds (clean price) - bond price, expressed as a percentage of the nominal value which does not include the interest accrued from the end of the interest period to the date of purchase of bonds,
  • Settlement price of bonds (dirty price) - the price at which the bonds are sold in exchange transactions and contains the value of the interest accrued from the end of the interest period to the date of purchase of bonds.

The amount of remuneration paid by the issuer to the holder of the bond depends on their interest rates. Due to the type of interest can be divided bonds:


  • Zero-coupon bonds - bonds without any interest. The issuer buys out them at face value. The remuneration of such bonds is done on a discount.
  • Fixed rate bonds - bear interest at a fixed interest rate,
  • Floating rate bonds - the interest rate varies in different periods of interest and is dependent on some reference size,
  • Indexed bonds - are a type of floating-rate bonds, in the case of a reference size is inflation rate.
Bonds may be issued in the form of a traditional document or in dematerialized form. Rights connected with the bonds of the second type arise from the moment of an appropriate entry in the records. The bondholder is the person specified in these records. In this case, the rights and obligations of the bonds are defined in terms of the issue.



Bonds are, in general, useful tool for investors. In Poland, there is a possibility to invest in corporate bonds and bonds issued by public entities (corporate and municipal). The first ones can be interesting not only for the investors, but also for the entities, which tries to gain some additional capital. Government bonds, however, creates not only possibility to earn money from the interest arose from them. In Poland, there is also possibility to trade with every kind of bonds on the public market.

There is possible to trade with bonds on the public market. In Poland, this possibility is created by the “Catalyst” Market and the Treasury “BondSpot”. More information about them is available on the following websites: BONDSPOT


There are many regulations concerning issuing bonds by the public and private entities and entering into the public market. They will be briefly presented below.

Corporate bonds

In Poland, corporate bonds may be issued by joint-stock companies, limited liability companies and limited joint-stock partnerships.

Corporate bonds does not give the holder any corporate rights, like ownership, dividend or participation in general meetings. Unlike the shares, the main goal of issuing bonds is to transfer the capital to the company by investors (bondholders).

Benefits of the corporate bonds can have not only monetary character. The benefit in kind arises out of the following types of bonds:

  • convertible bonds,
  • bonds with the right of priority.
Convertible bonds consist of bonds and call options of the company’s shares. They allow for conversion of bonds into shares. Issue of convertible bonds is convenient for companies in the early stages of development. They allow for avoidance of share capital’s dilution and limit the number of shareholders. The founders retain a substantial impact on the determination of the company's strategy at an early stage of development.


Bonds with priority rights allow subscribing to shares of the company with priority over its shareholders.


What is important the issuance of bonds can occur in three modes:

  • public,
  • offering of bonds to at least of 150 entities or unspecified circle of recipients, except that the bonds are not intended for public trade,
  • non-public (offering bonds to max. 149 entities).
Government and municipal bonds
In Poland, there is possibility to invest in following kinds of bond:
  • government bonds,
  • municipal bonds.
Government bonds are issued by State Treasury. The payment of funds is guaranteed by the state, so in theory, government bonds are one of the safest forms of investment capital on the market.


Currently available for the retail sale government bonds belong to the group of saving bonds. They are offered only to natural persons, as well as social and professional organizations and foundations entered into the National Court Register. They may be traded on the secondary market, but are not listed on the Stock Exchange. Access to resources is ensured thanks to the option of early redemption. Saving bonds are issued every month and always sold at a price equal to the nominal value, i.e. 100 PLN.


Government saving bonds have no tangible form. The buyer receives whereas printed proof of purchase and upon request, registered deposit certificate. Confirmation of purchase is not a security.

Government wholesale bonds are issued by tender organized by the Polish National Bank. They are addressed to a closed group of institutional investors and play an essential role in covering the borrowing needs of the state budget. A characteristic feature of the wholesale market of the wholesale bonds is relatively high nominal value offered instruments amounting to 1,000 PLN. Direct access to the tender is reserved only for the entities possessing the status of Treasury Securities Dealers and the National Economy Bank. Other investors interested in buying the securities must use intermediary of the Treasury Securities Dealers.

Municipal bonds can be issued by every local government units in Poland. Basically, they have the same character and functions as government saving bonds.

INVESTMENTS IN SHARES

General information

In

Poland, shares can be issued only by limited joint stock partnership or joint

stock company. They are defined as a securities issued to the holder of the

share of the company. Anyone who has at least one share of the company owns

part of its assets. As a co-owner of the company, each shareholder has the

property rights to the share, which have no time limit, because shares are

issued for an indefinite period. The shares incorporate i. a. following

shareholder's rights:


  • the right to the dividend,
  • the right to participate in the general meeting of shareholders,
  • the right to be elected to the authorities of the company.
Shares

may be assigned to certain entity (registered) or anyone who currently

possess them (holder).



The

shares cannot be divided. They may be, however, issued in the form of a

number of collective actions. Shares may be also the subject of joint

ownership. In this case joint owners of shares exercise their rights in the

company through a common representative, and they are jointly and severally

liable for the obligations associated with the action. If the joint owners

have not stated a representative, statements can be made against any of them.



The

shares shall have equal nominal value (not less than 0,01 PLN) and they

create the company's capital. The entities acquiring shares make payments to

cover the share capital, which should have at least 100 000 PLN.



The

issue price is the price at which the company sells shares. It may be higher

than the nominal value. The difference between the nominal value and obtained

issue price is spent on reserve capital.



The

rights and obligations attached to the shares are the same. However, articles

of association may grant certain additional rights to shares or assign them

specific duties (privileged shares).



Public trade



Public

proposing of purchase is an offer of securities addressed to at least 150

entities, or to an unspecified number of them. It may be carried out only by

a public offering.



Shares

which are in public trade can, but don’t have to be subject of trade on the

stock market. To enter into stock market, entity has to fulfill certain

conditions provided by law.



The

Stock Exchange allows companies to acquire the necessary capital through the

sale of shares. In this way companies can obtain funds for development and

investment without incurring debt - purchase of shares is just an offer to

buy part of the ownership of the company. In order to encourage investors to

purchase shares, the company must publicly present a substantial amount of

information about its financial condition and development plans.



In

the case of an initial public offering, the public offer or the admission of

securities to trading on a regulated market requires the preparation of the

prospectus, then its approval by the Financial Supervisory Commission and its

publication. Details of this procedure are determined by law. There are also

exceptions from this rule. They are based primarily on the nature of the

issue - its size, a par value of shares or buyer.



The

public institution designed to provide the possibility of trading securities

in Poland is Warsaw Stock Exchange. The Warsaw Stock Exchange is a major

component of the secondary market. In addition to the Main Market Square, it

provides possibility to trade the small companies market – NewConnect. More

information about this markets are available on the following websites:

GPW WARSAW STOCK EXCHANGE

NEW CONNECT

INVESTMENTS IN REAL ESTATE

In order to realize investments related to real estate, and carry out transactions of buying or selling real estates, it’s necessary to know the building law, the existing building standards and real estate law.

Acquisition of real estate and buildings always is associated with such issues like building permits, land development conditions, permission to build an object, the land use plan established by local government units and associated procedures and deadlines.

On the other hand, the construction process often requires from participants a conclusion construction contracts. It’s a special type of contract, precisely regulated by Polish law.

There are also special requirements concerning purchasing real estates by foreigners. The acquisition by a foreigner ownership or perpetual usufruct of real estate requires the permission of the Minister of Internal Affairs. This rule also applies to foreigners who purchase or acquire shares in commercial companies established in the Poland who possess ownership or perpetual usufruct of real estate in Poland. In order to obtain a permit foreigner should submit a request for a permit. Together with the request must be submitted original proof of payment of stamp duty.

Permit is issued, if:

  • acquisition of real estate by a foreigner does not pose a threat to State security or public order, social policy and public health doesn’t oppose to that,
  • foreigner prove that there are circumstances confirming his ties with Poland.
There are few exceptions of the rule. Most of them concern foreigners, who obtained permission for residence in Poland or other country or European Union and live there for certain period. However, any exemptions from the requirement to obtain permission for the acquisition of real property shall not apply if the subject of the acquisition is real estate situated in the frontier zone or agricultural land with an area exceeding 1 ha.


Important fact is, that in case of citizens of USA, purchasing premises which are destined to providing services, generally requires obtaining a permission regardless of the fact whether the premises is located in the frontier zone or outside the zone.

Additional requirements need to be fulfilled in order to trade with agricultural properties, whether the entity is Polish citizen or not. In case of sale of agricultural property right the tenant is entitled to preemption right on certain conditions and, he must be informed about the sale. If there’s no tenant entitled to preemption, or in the case of resigning of that right by him, to preemption is entitled the Agricultural Property Agency.

From the tax point of view if a sale does not occur in the conduct of business and have been made before the expiry of five years from the end of the calendar year in which the acquisition or construction, the seller should pay personal income tax from the sale. This tax is payable without summons within 14 days from the date of the sale. Only the business activities in area of real estate would allow avoid obligation of paying income tax before the expiry of five years from acquisition.

ALTERNATIVE INVESTMENTS

Alternative investments are investments in products other than traditional stocks and bonds. This definition is quite wide and includes tangible assets such as art, wine, antiques, coins, old books and some financial assets such as raw materials, hedge funds, venture capital, private equity and derivatives. There are no strict regulations concerning this kind of activities. However, on the grounds of them can arise many legal problems. It’s worth to know, what areas of law are applicable in case of certain investments. Most popular alternative investments are following:

  • alcohols (wine, whisky, etc.),
  • noble metals (gold, silver),
  • artworks and monuments,
  • derivatives
Investments in alcohols doesn’t create any special legal problems. Any adult person is allowed to buy them in Poland, so from the legal point of view, it’s an ordinary contract of sale, regardless of the scale of the transaction.


Scale of transaction can be important only in case of transport alcohols over the borders of the European Union area. EU imposed quantitative limits for the export of these kinds of commodities.

Gold, silver, platinum and other precious metals can be bought by each natural person with full or limited legal capacity and legal person.

In case of artworks and monuments, it’s necessary to point difference between these two terms. There are distinguished monuments that also are artworks, monuments that are not artworks and artworks that are not monuments. Objects, which have significant artistic value should be considered as artworks. Lack of the last one determines the fact, that the object is not the artwork but it still may be a monument. It just has to have, for example, scientific or historical value.

Distinction described above is important, because there are other regulation concerning trade with artworks and monuments and their protection.

In Poland, there are public authorities of the cultural heritage and protection of the monuments. It should be noted that investments which involve artworks or the monuments have to be performed in compliance with the regulations of the law, and under supervision of these authorities.

Example of alternative investments in financial instruments, which become popular recently, are derivatives. Their significance in Poland is still growing, and currently there is possibility to trade with futures and options on the stock. In Polish law, however, there are still no strict provisions, regulating legal situation which arise from concluding these kinds of contracts.

Derivatives market traded on a regulated market, are characterized by some standardization of contracts. However, these kinds of contracts are also concluded in free trade.

Case

Tom is an American developer. He moved to Poland and decided to start his own business. His idea is to buy agricultural lands, transform them into real estates and build houses. To realize this purpose, he needs to gain some financing, workforce and necessary administrative consents. This kind of activity can be conducted in various legal forms. It depends, whether Tom is more interested in limiting his liability or tax optimization. Chosen form of conducting business also determines the scope of possibilities for gaining financing which would allow him to expand the business.

Setting up the limited liability company and then limited partnership, when the partner is LLC, is very preferential form from the point of taxation and allows reducing liability for the partnership and the business operations it preforms. When it comes to taxes, general partner of the partnership (the limited liability company) is taxed in the partnership, with corporate income tax corporations - the corporate income tax has steady, 19% rate. In order to reduce taxes of the general partner, it is stipulated in the articles of association that the general partner will receive 1% of income. The 99% of income will go to limited partner and Tom would be a limited Partner. He will be on the other hand burdened with personal income tax. Basically the tax rates are 18% and 32 % for the income which is higher than 85 532,00 PLN In this way the limited partner will not pay anther tax which would be due in corporations and is imposed on shareholders’ profits received from the company, which has steady 19% rate. This creates the issue of double taxation in corporation (first the profit of the corporation and next the shareholder profit is taxed). Tom will pay only personal income tax. The general partner on the other hand (the limited liability company established by Tom) will have a very low income (1% or even 0,1%) so the issue of taxation is not the problem here. Tom would be satisfied with this solution from tax optimization point view.

Establishing LLC the general partner in limited partnership leads also to limit Tom’s liability for the partnership. LLC remains fully liable for the obligation and Tom’s liability is limited to the commendam sum. Tom wouldn’t be also responsible for the LLC’s obligation itself – his risk is limited only to the value of shares.

On the other hand if Tom chooses LLC as his legal form of conducting business his LLC would be able to issue corporate bonds which could be an attractive way to gain some additional money than getting loan from bank. This possibility creates also joint stock company and limited joint stock partnership. From the point of taxation, the last one is treated like a company and doesn’t create possibility to optimization like limited partnership.

Moreover, if Tom would want to expand his activity, he could also gain capital by issuing shares and enter into the public market.

When it comes to the operational business, Buying agricultural lands would be limited both, by the rules of acquiring real estates by foreigners and special regulation concerning agricultural lands. If Tom would fulfill necessary legal conditions, and the privileged entities wouldn’t use their right of preemption, he could successfully acquire ownership. The next step would be administrative procedure of transforming the destiny of real estate. In Poland, he would also have to get permission for the building from the local authorities.

Of course Tom may have to hire employees. He could use, without special limitation, alternative ways of employment. It could allow him to reduce costs in comparison to traditional employment contracts. He could also outsource certain areas of activities to other entities on the basis of private law contracts.

After few years Tom decides to start another business. He has two ways to withdraw from the business. The first one is to sell his shares in the company (or right to participate in partnership). In this case, he transfers everything which is connected with the company/partnership – assets and corporate rights. If, however, Tom would want to keep is company/partnership and only change the kind of activity, he can use second solution and sell only assets of his enterprise. This transaction has additional advantage – it is exempt from VAT tax.