The US legal system is composed of several coexisting layers of laws that work in concert. As a federation of states, the District of Columbia and several self-governing territories, the USA has two primary levels of legal systems that exist in parallel:
The USA has a federal government under which each state has the authority to autonomously enact and enforce laws that do not conflict with those of the federal government.
These two levels of government often delegate their law-making or enforcing powers to specialised agencies that establish, adjudicate and enforce administrative regulations, or to local governments like counties and cities that promulgate local ordinances and regulations. Consequently, residents of large cities in the USA are often subject to five or more layers of legal systems at the federal, state and municipal levels of government, based on geographical location or conduct.
Sources of Law
There are many sources of law in the USA. At the federal level, there are five sources of law:
Although the sources of law for state governments can vary, most states have state-level equivalent sources of law. Federal sources of law tend to legislate national issues like immigration, national security, IP and cross-state crimes. State sources of law will address all other areas, including business law, family law, contracts and tort.
The US Constitution is the supreme law of the land in the USA and limits the power of the federal government. Other sources of federal law, such as those made by Congress or the administrative agencies under the executive branch, are constrained by the limits of governmental authority as outlined in the Constitution. Furthermore, parts of the Constitution, like the Bill of Rights, have been expanded over the years to constrain even state governments. The Constitution, in short, authorises other sources of law and outlines their limits.
The USA is a common law jurisdiction; under common law principles, precedents establish persuasive and often binding principles and rules. Case law in the USA, like in other common law jurisdictions, is a set of decisions made by the courts that may be cited as precedent.
Courts in the USA
Like the rest of the legal system, the court system in the USA has two parallel structures:
In the USA, both civil and criminal cases are usually filed in the same trial courts that are each a court of law, equity and admiralty. Only a few state courts and federal courts – most notably Delaware and federal bankruptcy courts – maintain a distinction between law and equity.
The US federal court system has three levels:
Litigation begins in one of the 94 district trial courts. Each district court belongs to one of 11 geographical areas dubbed “circuits” and each circuit has an appellate court, the court of appeals, which oversees appeals from district courts, specialised trial courts and administrative agency decisions within the circuit. The court of appeals is the court of final appeal for its own circuit, except for the very limited cases that are selected for discretionary review by the Supreme Court.
The Supreme Court is the highest court in the USA and performs discretionary review of the lower courts’ decisions. In addition to its discretionary appellate jurisdiction, the Court also has original jurisdiction over suits between two or more states and the power of judicial review – the ability to invalidate government actions for being unconstitutional. Most cases before the Supreme Court arise as an appeal from a court of appeals, but certain decisions of the district courts are appealable directly to the Supreme Court.
The organisation of state courts can vary substantially between states, but most states have at least two levels of courts: the trial courts and the state supreme courts. The state court systems also often have specialised trial courts to treat specific subject matter areas like housing courts, traffic courts, probate courts, small claims courts and family courts, as well as intermediate appeals courts much like the federal court system. Naturally, state supreme courts act as the final adjudicator on state law matters.
Committee on Foreign Investment in the United States (CFIUS)
Although the USA generally maintains an open policy towards foreign direct investments, the government scrutinises incoming investments that may raise national security concerns. CFIUS is the primary overseer of foreign investments in the USA and can review any investments or acquisitions that might give control of entities engaged in US interstate commerce to foreign investors or buyers, as well as certain real estate transactions. In addition, non-controlling foreign investments into US businesses that handle critical technology, infrastructure or sensitive personal information of US citizens are subject to CFIUS review if the investment affords the foreign investor certain triggering rights. The rules contain a carve-out from CFIUS jurisdiction for non-controlling investments by “excepted investors” from Australia, New Zealand, Canada or the UK.
The term “control” is used broadly by CFIUS, which considers any non-passive transactions exceeding 10% of the voting interests in a US company as potentially reviewable. However, CFIUS allows a safe harbour for passive investments with less than 10% of the voting interests in a US company as long as the investors do not intend to exercise control.
Companies usually file voluntarily for CFIUS review, but the committee can also exercise its own prerogative to initiate a review. In addition, the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) mandated CFIUS filing for certain investments by investors owned 49% or more by foreign governments and for certain critical technology transactions. Since CFIUS can conduct reviews retroactively and can modify or completely “unwind” investment deals, the best practice is often to complete CFIUS filing prior to closing an investment in a US company by a foreign investor.
Several legal regimes mandate disclosure or filing for foreign investors acquiring an interest in the USA. The International Traffic in Arms Regulations (ITAR) require any person or company that engages in the USA in manufacturing or exporting defence articles, or furnishing defence services, to register with the Department of State Directorate of Defense Trade Controls (DDTC). A foreign investment that results in foreign control of ITAR-registered entities is one of the cases in which FIRRMA mandates CFIUS filing. In addition, the ITAR may require notification filings to DDTC 60 days before and/or five days after the closing of the transaction. Similarly, US businesses must also file Form BE-13A whenever a foreign entity acquires a voting interest in the following circumstances:
In addition to CFIUS, various international and US trade controls apply to cross-border transactions and investments. Economic sanctions administered by the Treasury Department, for example, may prohibit or restrict foreign investments originating from specific countries. Similarly, anti-boycott measures enforced by the Commerce Department can also impact foreign investments entering the USA.
Voluntary CFIUS notifications are typically filed jointly by the target and the investor. The mandatory filing obligations, when applicable, likewise fall on both the investor and the target.
Once CFIUS begins its review, a US target must disclose information regarding its businesses, and foreign investors must submit information about their corporate structure, management and significant shareholders. The required disclosure of the ownership of foreign investors is significant and the identity of the ultimate controlling owner of, for example, family holding companies or fund vehicles must be disclosed. CFIUS can require additional information during the review process to facilitate its decision.
The statute prohibits CFIUS from publicly disclosing any information filed by transaction parties, subject to limited exceptions, and information and documentary material filed with CFIUS are exempt from disclosure under the Freedom of Information Act. CFIUS does not disclose whether parties to any transaction have filed notices with CFIUS, nor does it disclose the results of any review. For those relatively few transactions referred to the President, however, the decision of the President is announced publicly.
CFIUS has 45 days to review the transaction (from the date of acceptance of the notice, which may be a few days or even weeks after the date of filing), and can extend the review for an additional 45 days, with another 15-day extension available if any CFIUS agency has national security concerns about the transaction. Transactions that involve entities affiliated with foreign governments or critical US infrastructure almost always necessitate the second 45-day review. CFIUS can prolong the review in practice by delaying the acceptance of the formal filing. At the end of its review, CFIUS will clear the transaction, negotiate a mitigation agreement, permit refiling for additional review, or file a report to the President. Once CFIUS submits the report, the President can require conditions to force a mitigation agreement, clear the deal or prohibit the deal.
Pursuant to FIRRMA, parties now have the option of filing a short-form declaration with CFIUS rather than a full notice. The timeline for CFIUS to take action on declarations is shorter than for notices, as CFIUS has up to 30 days (from the date of official filing rather than the date of acceptance) to respond to a declaration. However, unlike in the case of a notice, CFIUS need not make a final determination with respect to a transaction on the basis of a declaration. Therefore, it is inadvisable for parties seeking speedy action by CFIUS to file a voluntary declaration unless they are confident CFIUS will grant approval.
CFIUS may condition clearance of a transaction on parties entering into mitigation agreements with the US government to neutralise national security concerns. The President may also condition approval on specific remedies. Mitigation conditions are fact and circumstance-dependent, with the size and scope of mitigation varying widely on a case-by-case basis. Common remedies include:
Parties generally cannot appeal the President’s determination or mitigation conditions, and typically withdraw their CFIUS filings if they expect a negative CFIUS determination. The President and the executive branch are immunised from judicial review on numerous facets of the CFIUS review process.
Parties may have due process rights during the CFIUS review, including access rights to information used during the review. Furthermore, many areas of CFIUS review that are not statutorily immunised from judicial review may also be open to judicial challenge.
A sole proprietorship is owned and operated by a single individual, and there is no legal distinction between the business and the owner. It is unincorporated and requires no legal action or documentation. Furthermore, it provides no legal protection to the owner for any liabilities arising out of the business. Although they give their owner complete control and have no entity formation costs, sole proprietorships are uncommon because of their significant disadvantages, like unlimited personal liability, difficulties in raising capital and heavy burdens regarding ultimate responsibility for the sole owner.
A partnership is an association of two or more persons as co-owners of a business for profit. Partnerships can be created formally through a contract, or can even be found to exist where certain facts are present, such as two or more persons having involvement in management, carrying on the business, sharing property or sharing profits. Partnerships are subject to the formal governance requirements of state partnership laws and are typically governed by a partnership agreement. As a legal entity, a general partnership is not fully separate from its general partners; however, it may still own property, engage in contracts and sue or be sued. Also, a partnership may consist of individuals or any type of entity, and may even consist of US and non-US persons (subject to certain restrictions for regulated industries).
A partnership may be created as a general partnership, a limited partnership or a limited liability partnership, depending on the distribution of management rights and liabilities among the partners.
In a general partnership, all partners manage the business and each partner has the authority to act on behalf of the company. However, general partnerships give rise to joint and several liability of each partner for the debts of the partnership.
A limited partnership consists of both general partners and one or more partners that are known as limited partners, who contribute solely as an investor in the business. A limited partner’s liability extends only to the amount that they have contributed to the company; the general partners are liable for any and all of the company’s financial obligations, while limited partners have no liability with respect to company debts. Limited partners have no company involvement and no daily responsibilities, except as negotiated in the limited partnership agreement.
A corporation is a separate legal entity that is created under the laws of the jurisdiction of its incorporation. Corporations notably limit liabilities for their owners. Corporations are owned through shares of stock, and owners of a corporation are called “stockholders” or “shareholders”. When a corporation observes the required state corporate formalities, its shareholders have limited liability. Because a corporation is a separate legal entity from its owner(s), a corporation is entitled to own property, enter into its own contracts and sue or be sued under its own name. Corporations may be owned by US persons or non-US persons; a non-US person, however, cannot own an S-corporation.
When a for-profit corporation is established, it is automatically considered a C-corporation. C-corporations are taxed at the entity level, and shareholders end up being “double taxed”. A company’s profit will be taxed first at the corporate level, and the shareholders, if they receive dividends, will pay tax again in an amount determined by their personal tax bracket. Investors tend to prefer Delaware C-corporations because there are no restrictions on the type of entity that may own a C-corporation, no restrictions regarding foreign persons owning a C-corporation and no restrictions on the amount of shareholders allowed to own a C-corporation.
The profits of an S-corporation are distributed directly to its shareholders, who would then be taxed on a presumably larger amount. S-corporations and partnerships are pass-through entities for tax purposes, so they have no entity-level tax. If a company wishes to be an S-corporation, it would make an election at the time of filing with the Internal Revenue Service (IRS). S-corporations’ shareholders are limited to 100 natural persons and can only be US citizens or US residents.
The majority of USA jurisdictions, including Delaware, have another kind of corporation known as a “public-benefit corporation”. Although the statutes governing such benefit corporations vary, benefit corporations typically must simultaneously pursue the pecuniary interests of stockholders and one or more statutorily defined “public benefits”. A “public benefit” can include pursuits of an artistic, charitable, cultural, economic, educational, environmental, literary, medical, religious, scientific or technological nature. Unlike C-corporations, benefit corporations may consider goals other than the maximisation of shareholder value and can act in ways deemed more socially responsible. Benefit corporations occupy the middle ground between traditional for-profit corporations and not-for-profit entities.
Limited Liability Companies (LLCs)
LLCs have the characteristics of both partnerships and corporations. Like corporations, LLCs provide their owners with limited liability, and like partnerships, LLCs are pass-through entities for tax purposes and provide owners with great flexibility regarding the governance and organisation. LLCs are also separate legal entities and have the ability to enter into contracts, own property and sue or be sued in their own name. LLCs limit the liability of their owners to their contribution/investment like corporations, so LLCs have become popular as an entity choice for small US businesses. Unlike S-corporations, LLCs do not generally limit ownership to US persons.
A handful of states, including Delaware, also permit a form of LLC known as “series LLCs”. Most commonly used for mutual funds and investment funds, a series LLC allows each “series” of an LLC to act almost like a separate entity. Each series may have separate and distinct:
A subtype of series LLCs known as a “protected series LLC” may even limit the liabilities of each series against the debts, liabilities and obligations of other series. Such series LLCs allow great flexibility in structuring and organising entities without the administrative burdens and costs of alternatives like forming multiple LLCs.
Corporations are created under state laws, and a corporation is established by filing articles (or a certificate) of incorporation with the selected state of incorporation. Typically, it takes about two to three business days for a company to become incorporated. For larger corporations, Delaware is the most common state of incorporation because it has the most developed corporate case law and courts can give rapid and predictable responses to corporate legal disputes. Apart from filing the articles of incorporation, certain corporate documents need to be drafted as well, including the corporate by-laws, a shareholders agreement and the initial resolutions of the board of directors.
The initial board resolutions will commonly appoint officers, create accounts and hire professional advisers. The by-laws set out the basic ground rules regarding corporate operations and must conform to the various rules of state corporation law, such as corporate formalities regarding procedures for meetings of shareholders and of the board of directors, officers and their duties, and certain responsibilities pertaining to the board of directors. A shareholders agreement sets out the rights of a company’s shareholders with respect to important details such as transfer restrictions on company stock, decisions requiring the unanimity of shareholders and mechanisms to resolve disputes between shareholders. Furthermore, the initial resolutions of the board of directors complete the organisation of the company by, inter alia, appointing the officers, adopting the shareholders agreement and authorising the issuance of shares to the stockholder.
In general, there are three types of reporting and disclosure obligations:
State-level requirements vary depending on the state. Under federal law, specifically the Securities Exchange Act of 1934, if a company is either public or big enough (ie, has more than 500 non-accredited shareholders and total assets exceeding USD10 million), it is required to disclose information to its shareholders in accordance with the SEC rules, which are more burdensome than state-level requirements. Contractual disclosure obligations arise from private arrangements, often between a company and its shareholders or creditors, that grant specific information or access rights beyond those required by law.
Federal law requires annual, quarterly and specific event reporting. Furthermore, when making any changes to its articles of incorporation, a corporation must amend its articles of incorporation and file them with the state.
Management structures differ amongst partnerships and corporations. Typically, a corporation is managed by a board of directors who will at first be appointed by the sole incorporator of the corporation and later voted upon by the shareholders. The USA has a one-tier board system and all the directors of a company – both executive and non-executive – jointly form the board of directors. This board of directors usually holds the exclusive power to manage the corporation.
In practice, the board retains the power to appoint officers, declare and pay dividends, amend the by-laws, initiate and approve extraordinary corporate actions (eg, M&A decisions) and make other major decisions, but delegates most day-to-day decisions to the officers. Officers such as the president, vice-president, treasurer and secretary will implement the board’s broader decisions and make the day-to-day decisions to run the corporation.
The process of these appointments and elections will be governed by the company’s by-laws, and it is not uncommon for directors or officers to be owners of the company. Shareholders also have certain key management powers, such as approval of major transactions, election of directors and dissolution of the corporation; however, the ultimate power of management and authority lies with the board of directors, as they have the responsibility to establish benchmarks and oversee the management of the business.
In contrast, partnerships are typically managed by general partners, where each general partner is an agent for the partnership and thereby has the power to act on behalf of the partnership when dealing with third parties. General partners can enter into contracts on behalf of the partnership, deal with third parties, hire staff and even borrow money on behalf of the partnership. However, unlike the authority and agent relationship that general partners have, limited partners do not participate in the day-to-day management or operations of the business and have very limited authority.
A corporation acts as a “veil”, shielding its shareholders from personal liability for the judgments, debts and other liabilities of the corporation. Shareholders of a corporation have limited liability, so they are only liable for the amount of capital that they have contributed to the corporation. However, unlike shareholders, directors and officers of a corporation have common law fiduciary duties imposed on them that they owe to the company, and directors and officers can be held jointly and severally liable to the corporation (and, derivatively, to its shareholders and creditors) for any injury that was caused by their breach thereof. These fiduciary duties consist of the duty of care, duty of loyalty, duty of good faith, duty to monitor and duty to act lawfully.
The doctrine of “piercing the corporate veil” is an exception to the general rule regarding limited liability for a corporation. Piercing the corporate veil occurs in very limited instances where a plaintiff can prove that a corporation and its shareholder acted as a single economic entity and that an overall element of injustice or unfairness is present. This occurs where a “dummy” corporation is acting as a shell to deflect liability from the owner. If a claimant succeeds with this claim, a court will disregard the separate legal existence of an entity and instead hold the owner directly liable for the other’s obligations. While this is an extreme and uncommon remedy, corporations and their affiliates should adhere to the requisite formalities and generally treat each other as distinct entities to minimise such risks.
Limited liability companies, as the name suggests, also share this characteristic of shielding interest holders from personal liability for the liabilities of the entity. However, LLCs have greater flexibility than corporations, and may contractually limit fiduciary duties imposed on their managers and officers. The duty of loyalty, for example, typically cannot be waived for corporate directors and officers under common law principles but may be waived for LLC managers and officers by contract.
Employment relationships in the USA are governed by a combination of federal, state and local laws, as well as by general principles of contract. Employers doing business in multiple states or municipalities within the USA must take into account not only federal laws, but also the laws of the state and local laws where the employees work and from which employment decisions emanate (eg, corporate headquarters).
One bedrock of employment law in the USA is “employment-at-will”; absent a contract or limitation imposed by law, the employer can fire employees without advance notice or cause, and employees can quit without advance notice or cause, and, in each case, without severance. Employment laws in the USA are best understood as limitations on the general doctrine of employment-at-will. These limitations, for example, are those imposed by contracts (including collective bargaining agreements), prohibitions on discrimination and retaliation, or protections with respect to mass lay-offs.
Written Employment Agreements
Not all employment arrangements in the USA are contractual. Generally, employers will elect to enter into a written employment agreement (ie, a contract to provide compensation for services) with key employees or where the employer seeks protection of its confidential and/or proprietary information. These agreements are based on the general principles of freedom to contract; contracts may not contain unlawful terms. The terms “Employment Contract” or “Employment Agreement” generally refer to an employment arrangement whereby the parties have agreed to certain terms altering the at-will nature of the relationship. Most commonly, such agreements may require the employment relationship to continue for a set term, unless some cause exists for one party to end the employment. Such agreements need not be in writing, and employers in the USA should be vigilant about inadvertent alterations to the at-will nature of the employment by words or conduct.
Where the parties intend to enter into a written employment agreement for a period of time (often for executive-level employees or other key employees), such an agreement will commonly include terms relating to wages/salary, bonuses, benefits, termination, severance, the assignment of intellectual property, the confidentiality of the employer’s information, non-competition obligations and non-solicitation obligations pertaining to customers, clients and/or employees.
Non-competition and non-solicitation obligations are generally governed by state law, and states vary widely on the permissibility and enforceability of such contractual obligations. In many states, written agreements containing confidentiality, non-competition, non-solicitation and intellectual property covenants are not mutually exclusive with an at-will relationship. In such states, employees who are employed on an at-will basis may still be required, as a condition of their employment, to sign written agreements concerning such matters.
Collective bargaining agreements
Collective bargaining agreements are agreements typically entered into between an employer and a union representing a certain group of non-managerial employees. While collective bargaining agreements are different in form and substance from executive employment agreements, they typically have terms providing that employees may only be terminated for “just cause”.
Where the employer seeks to enter into a relationship other than an at-will relationship, best practices dictate that such agreements should be in writing and carefully drafted. Courts will generally view the specific language of a written employment contract as the clearest manifestation of the parties’ intent.
Fair Labor Standards Act (FLSA)
The FLSA is a federal statute that sets several minimum standards concerning wages and hours. States and municipalities may bolster these protections with supplemental laws imposing higher standards. With limited exceptions, the FLSA sets the nationwide minimum wage at USD7.25 per hour, prohibits child labour and adds protections for employees under the age of 18. Importantly, it also requires employees to be paid overtime at a rate not less than one and one-half times their regular hourly rate of pay, for all hours worked over 40 hours in a week, unless they are covered by a specific exemption. Those exemptions include the so-called white-collar or EAP (executive, administrative and professional) exemptions for employees in executive, administrative or professional roles. Generally, a threshold requirement for these exemptions to apply is that the employee is paid a salary (as opposed to an hourly basis) at a certain minimum rate and that the employee’s duties meet certain specific requirements pertaining to the given exemption. “Salary” generally refers to paying an employee a fixed amount per week that is not dependent on the time worked (and which is not reduced for absences of less than a full day).
Several other exemptions from overtime pay exist, including exemptions for computer workers and outside sales employees. In each case, however, it is critical that employers carefully examine the employee’s duties to determine whether the exemption applies prior to designating an employee as “exempt” from the overtime requirement.
While there is generally no law prohibiting non-exempt workers from being compensated on a salary basis, doing so does not absolve the employer from the responsibility to track hours and ensure the employee is paid “time-and-a-half” the regular rate of pay, calculated in accordance with applicable laws. Because the computation of overtime is more complicated for employees paid on a salary basis, most employers pay non-exempt employees on an hourly basis. Many states impose more stringent standards for classifying an employee as exempt, require overtime to be paid under different standards, have higher minimum wages or have different requirements pertaining to the calculation and payment of wages.
The Department of Labor (or state equivalent) can investigate and initiate enforcement proceedings against an employer for not complying with the FLSA or state law requirements pertaining to wages and hours. Individuals can also sue for lost wages or overtime compensation on behalf of themselves or as part of a collective or class action.
Other Labour Requirements
Other labour requirements to consider include the following:
Since the USA is predominantly an employment-at-will jurisdiction, absent some legal or contractual limitation, employees can be fired without cause or notice and can quit without cause or notice (in each case, without severance).
The limitations on employment-at-will include laws prohibiting employment decisions made because of an employee’s protected status. Chief among such laws, at the federal level, is Title VII of the Civil Rights Act of 1964 (Title VII), which makes it impermissible for most employers to discriminate based on race, colour, sex, religion or national origin. The US Supreme Court has ruled that Title VII’s prohibition on discrimination on the basis of “sex” includes sexual orientation.
Similarly, the Age Discrimination in Employment Act prohibits covered employers from discriminating against people over the age of 40. The Americans with Disabilities Act prohibits covered employers from discriminating against people on account of disability and requires employers to provide reasonable accommodation to qualified individuals with disabilities who are employees or applicants for employment, except when such accommodation would cause an undue hardship. As in other areas, state laws may offer significantly greater protections and expand such protections to additional protected groups.
There are relatively few protections pertaining to mass terminations. The federal Worker Adjustment and Retaining Notification Act (WARN) requires an employer to give 60 days’ notice of a plant closing or mass lay-off that will result in significant job terminations at a single site of employment and sometimes of a reduction of work hours. WARN only applies to companies with more than 100 employees and to events that affect more than 50 employees. A few states have their own plant closure laws in addition to WARN.
Except as provided for in a bargained-for contract, employees are not entitled to severance. Pursuant to the Consolidated Omnibus Reconciliation Act (COBRA), where an employer gives its employees the opportunity to participate in a group healthcare insurance plan, upon separation, covered employees are entitled to continue health insurance, at their own expense, for a period of time. The employer or the employer’s benefits provider is required to provide covered employees with notice of their rights under COBRA.
Many employment-related contracts in the USA include provisions requiring the parties to arbitrate future disputes. In January 2019, the Supreme Court reiterated its prior decisions that parties to a contract have the ultimate say in whether to have an arbitrator or a court resolve disputes between them. This includes not only the merits of such disputes, but also the question of whether a particular dispute is arbitrable.
Employees may be represented by a union or similar labour organisation if a majority of eligible workers in the bargaining unit vote in favour of such representation in a secret ballot election supervised by the NLRB. If a union is certified through such an election as the bargaining representative of employees in the bargaining unit, such representation is on an exclusive basis. The employees in the bargaining unit will generally be required to join the union and pay union dues (even if they personally voted against the union). Furthermore, the employer will be required to enter into good-faith negotiations with the union or risk an “unfair labour practice charge” being filed with the NLRB.
In the USA, the tax system mirrors the federal structure of government, so tax law is promulgated and enforced separately at the federal, state and local levels. This section reviews federal tax law relevant to entities interested in doing business in the USA as enforced by the IRS. Any entity interested in doing business in the USA should also review applicable state tax laws and state taxing authorities, as well as local tax laws.
US citizens and resident aliens are generally subject to federal, state and local taxes on their worldwide income. The top marginal rate of federal income tax for the 2022 tax year is 37%. State and local taxes vary depending on location. Non-resident aliens are generally subject to net income tax on their US-source income that is “effectively connected” with a US trade or business, which generally includes wages received for the performance of services within the USA.
Wages are generally subject to income tax withholding and reporting by the employer. In addition, employers and employees in the USA must pay social security and Medicare payroll taxes. Generally, an employer is required to withhold its employees’ share of these taxes from the employees’ wages and to pay an employer’s share of these taxes. For 2022, the social security tax rate is 6.2% each for the employer and the employee (12.4% total). The maximum amount of wages subject to social security tax is USD147,000. The tax rate for Medicare is 1.45% each for the employer and the employer (2.9% total). There is no wage limit for the Medicare tax. An additional Medicare tax of 0.9% is withheld on wages paid to an employee in excess of USD200,000.
Employers must also generally pay unemployment taxes for their employees under the Federal Unemployment Tax Act (FUTA). Only the employer pays FUTA tax; it is not withheld from the employee’s wages. For 2022, the FUTA tax rate is 6.0%. The tax applies to the first USD7,000 paid to each employee as wages during the year. Employers may also be subject to state and local unemployment taxes.
Special rules apply in the case of persons that are employed by foreign employers, and applicable tax treaties can modify the above treatment.
Taxation of Investment Income
In general, a foreign person that is not engaged in a US trade or business is subject to a US withholding tax of 30% on its gross investment income from US sources (eg, interest and dividends). The tax is generally withheld at source by the payor and, if the tax is properly withheld and remitted, the foreign person is generally not required to file a US tax return solely by reason of such income.
The withholding tax requirement is subject to certain exceptions. For example, the “portfolio interest” exemption, if applicable, eliminates the US withholding tax on US-source interest earned by a qualified foreign person. An applicable tax treaty may also reduce or eliminate US withholding tax.
In general, a foreign taxpayer is not taxed on gains from the disposition of a US investment unless the investment directly or indirectly involves US real property or constitutes an interest in a partnership (or LLC or other entity treated as a partnership for federal income tax purposes) through which “effectively connected” income is earned.
Taxation of Business Income
A foreign business wishing to establish a presence in the USA can generally establish a branch or choose to form a US entity through which it will conduct its operations.
A foreign taxpayer operating a US trade or business through a branch will be subject to regular US income tax on a net basis on income that is effectively connected with the US trade or business. If the foreign taxpayer is eligible for the benefits of an income tax treaty, the taxpayer generally must also have a “permanent establishment” in the USA in order to be subject to tax on its US business profits. A foreign corporation conducting a US trade or business through a US branch may also be subject to a branch profits tax in certain circumstances.
An entity classified as a partnership for US federal tax purposes is not generally subject to entity-level US federal income taxes. Instead, the members of the entity are taxed on their respective shares of any income of the entity that is subject to US tax.
A US corporation will generally be subject to tax on its worldwide income. As a separate entity for tax purposes, the corporation (and not its shareholders) will report all its income, losses, deductions and credits on a corporate income tax return, and pay tax at the prescribed corporate rate (the federal corporate tax rate is currently 21%). Dividends paid by a US corporation to foreign shareholders will generally be subject to US withholding taxes at a 30% rate, except as otherwise provided under an applicable income tax treaty.
The US does not have a federal sales tax or value added tax, but import tariffs and excise taxes may apply under certain circumstances. However, sales and use taxes are imposed by many state and local taxing jurisdictions in addition to state and local income, excise or other taxes.
US taxpayers are generally entitled to claim a credit (or a deduction) against their US tax liability for income taxes paid to a foreign country, subject to certain limitations.
Numerous federal, state and local business tax credits are available to taxpayers that engage in specified activities or make specified investments. Among other credits, taxpayers that meet applicable criteria are eligible to claim energy credits, low-income housing credits, new markets tax credits and work opportunity credits. In addition, a research tax credit is available for companies that incur R&D costs in the USA. Finally, state taxing authorities sometimes offer certain tax incentives in connection with operations in their jurisdictions.
In March 2020, the US government enacted the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), which responds to economic challenges faced by US taxpayers and businesses in light of the COVID-19 pandemic. The CARES Act includes various relief provisions for businesses and individuals, including certain tax credits.
In March 2021, the US government enacted the American Rescue Plan Act of 2021 (ARPA), which seeks to address the continuing impact of the COVID-19 pandemic on the US people and economy. ARPA contains numerous additional tax relief provisions, including the expansion of many tax credits, such as the child and dependent care tax credit and the earned income tax credit.
An affiliated group of US corporations may elect to file a federal tax return on a consolidated basis. Filing a consolidated return allows the affiliated group to combine the income and losses of its members, with gain or loss on intercompany transactions among the members generally deferred until a member leaves the group or until there is a transaction outside of the group. For this purpose, an “affiliated group” generally consists of a common parent corporation and domestic corporate subsidiaries that are connected by common ownership representing 80% of the voting power and value of each member. Many states allow combined reporting by affiliated entities in specified circumstances.
For federal tax purposes, the amount of a taxpayer’s deductible business interest expense in a taxable year generally cannot exceed the sum of the taxpayer’s business interest income for the year plus 30% of the taxpayer’s taxable income for the year, subject to complex adjustments and exceptions. Amounts disallowed may be carried forward.
In general, transactions between a US entity and its foreign affiliates must be at arm’s length. If the IRS determines that the US entity is either overpaying for property or services being provided to it by foreign affiliates or being inadequately compensated for the provision of property or services to foreign affiliates, it may reallocate income accordingly. The establishment of arm’s-length prices and the substantiation of those prices can be highly complex.
The US tax law and regulations thereunder contain numerous “anti-abuse” rules that are intended to prevent taxpayers from claiming inappropriate tax benefits. In addition, US courts have developed common law rules pursuant to which tax benefits can be denied if the taxpayer in substance has not satisfied the applicable requirements.
US taxpayers are also subject to numerous reporting requirements, including with respect to interests in foreign assets and certain transactions that have the potential for tax avoidance or evasion. In addition, the Foreign Account Tax Compliance Act generally imposes a 30% withholding tax on certain payments to foreign entities, unless the foreign entity collects and reports information on its US owners or account holders, or otherwise qualifies for an exemption and provides appropriate documentation to the withholding agent.
Section 7 of the Clayton Act prohibits acquisitions of assets or stock where “the effect of such acquisition[s] may be substantially to lessen competition, or to tend to create a monopoly.” The Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act") gives the Department of Justice (DOJ) and the Federal Trade Commission (FTC) the power to review M&A that might substantially impact competition.
The HSR Act requires parties to notify the FTC and DOJ of certain acquisitions of voting securities and non-corporate interests (eg, interests in partnerships or LLCs) or assets, as well as the creation of certain joint ventures.
Transactions must be reported, unless an exemption applies, if they meet the following three tests:
The Size of Transaction Test and Size of Person Test thresholds are revised every year.
Parties are free to submit HSR Act required filings any time after a letter of intent or definitive agreement is executed. Both the buyer and the seller are required to submit HSR filings to the FTC and DOJ. The HSR filing is confidential (both its content and information that the filing has been made). The parties must also pay mandatory filing fees.
Once filings are made, the FTC and DOJ review the transaction over a 30-day waiting period, during which the parties are not entitled to close the transaction. If the agencies take no action at the end of this waiting period, the parties are free to close their transaction. The agencies can issue a “Second Request” before the end of this time period, which extends the waiting period, if they wish to obtain additional information from the parties.
Non-compliance with the HSR Act can result in a maximum civil penalty of up to USD46,517 per day.
Section 1 of the Sherman Act prohibits agreements between competitors in restraint of trade. The Federal Trade Commission Act prohibits “unfair methods of competition” and “unfair or deceptive acts or practices”. There are also laws at the state level that prohibit essentially the same type of conduct as the federal laws.
Among others, antitrust laws prohibit hardcore cartels – ie, agreements between competitors to fix prices, restrict output, rig bids, or allocate customers or geographic territories. These agreements are illegal “per se”, meaning that they are presumed to have anti-competitive effects. They can be prosecuted criminally.
Foreign conduct that involves US “import trade or import commerce” or that has a “direct, substantial, and reasonably foreseeable effect” on US domestic or import commerce, or on the export commerce of a US company, may fall under the reach of US antitrust laws.
Section 2 of the Sherman Act prohibits unilateral conduct within an industry, otherwise known as monopolisation. It is not illegal to possess a monopoly, but it is unlawful for firms to engage in anti-competitive conduct to acquire or maintain monopoly power. Enforcers first look to whether a corporation has monopoly power – ie, the power to control prices or exclude competition. A large market share is an indicator of monopoly power. Enforcers also assess other factors, including barriers to entry, the size and strength of competitors, industry pricing, the ability of customers to switch suppliers and the strength of demand.
Once enforcers have assessed that a firm has monopoly power, they look at whether the company has engaged in exclusionary or predatory conduct. The Sherman Act targets companies that engage in predatory pricing, boycotts, tying, disparaging competitors and exclusive dealings, amongst others.
Section 2 of the Sherman Act also prohibits attempted monopolisation. Agencies must show that a company has engaged in anti-competitive behaviour with the specific intent to acquire a monopoly and that there is a dangerous probability that it will indeed obtain monopoly power.
A utility patent is a grant by the US government to a patent applicant of certain rights relating to an invention in the United States. Absent a written agreement to the contrary (eg, with the inventor’s employer), utility patent rights vest in the inventor. An invention encompasses a new and non-obvious composition of matter, article of manufacture or process. A patent allows the inventor to exclude others from making, using, selling and offering for sale the invention within the USA, and from importing the invention into the USA. Patent exclusivity rights generally last for a 20-year period beginning when an application for a patent is filed; however, the patent is not enforceable until after the application is examined and the patent is granted by the US Patent and Trademark Office (USPTO). In exchange for exclusivity, the US government requires full disclosure of the invention so the public can use and benefit from the invention after the patent expires.
In order to obtain a patent, an inventor must file a patent application with the USPTO, which will review the application in order to determine whether the invention meets several conditions of patentability. For instance, the invention must be of practical use and show an element of novelty, meaning the invention has new characteristics outside existing knowledge in its particular technical field. The invention must also not be simply a modification or improvement of a known product or process that would have been obvious to a person with average knowledge in the particular field (also known as “a person of ordinary skill in the art”). Lastly, the subject matter must be “patentable” under law; certain types of innovations and scientific discoveries are not considered patentable, such as laws of nature, natural phenomena and abstract ideas. It typically takes between three and five years for the USPTO to complete its examination of a patent application.
US federal law governs patent enforcement. Thus, a patent owner can enforce its patent rights against an infringer in the USA in a legal proceeding in US federal court. If the court finds infringement, it may issue an order such as an injunction to prevent further use of the patented invention and award financial compensation to the owner for infringement.
A patent holder also can enforce its patent rights through the International Trade Commission (ITC) against entities importing infringing products into the USA. If a patent holder is successful, the ITC can issue an exclusion order prohibiting importation of the infringing product into the United States. Patent infringement is a “strict liability” offence – ie, the infringer need not act with any bad intent and does not even need to know about the patent in order to infringe it. However, wilful infringement of a patent can lead to an enhanced damages award against the infringer.
A trade mark is a word, phrase, symbol or design that identifies and distinguishes a source of goods of one individual or company from those of another. Trade mark protection ensures that owners of the marks have the exclusive right to use the mark to identify goods or services, or to authorise others to use the trade mark. Generally, trade marks are protected for ten-year periods and are renewable upon expiration.
Trade mark protection in the USA is available for marks that are distinctive (not descriptive or generic) for the goods and/or services associated with the trade mark. In order to register a trade mark, it is possible to file an application for registration with the USPTO. The USPTO may reject a trade mark application on several grounds, the most common of which are that the mark is not distinctive and/or that the mark is likely to cause confusion with the mark in a prior registration or pending application. To qualify for federal registration with the USPTO, an applicant must also show that the trade mark will be used in interstate commerce.
Trade mark owners must remain vigilant in protecting their marks by taking appropriate action to enforce their rights. If an entity is using a trade mark without authorisation, the trade mark owner has several options to enforce its rights, including sending a demand letter, filing a lawsuit asserting trade mark infringement and/or unfair competition, or petitioning for opposition or cancellation proceedings before the Trademark Trial and Appeal Board. Available remedies in a trade mark infringement matter include injunctive relief and monetary damages.
Design patents give their owner exclusive rights to an ornamental design, allowing the owner to prevent third parties from making or selling products that share design features that closely resemble those protected by the design patent. Design patents are applied for at the USPTO by inventors in a similar fashion as utility patents and can cover the ornamental design of a wide variety of products, ranging from medical devices and household appliances to consumer electronics and even graphical user interfaces. Design patents have a term of 14 years from the date of issuance if filed before 13 May 2015, and 15 years if filed on or after that date.
Design patents only protect the ornamental features of the registered design. Any functional feature is not protected by the design patent and the owner must seek a utility patent to protect any functional features.
Similar to utility patents, design patents are governed by US federal law and a patent owner can enforce its patent rights against an infringer in a legal proceeding in US federal court seeking an injunction and/or financial compensation.
Copyright law in the USA protects all original works of authorship that are fixed in a tangible form of expression. These categories of works include:
In the USA, copyright law protects the expression of ideas rather than the ideas themselves, and applies to both published and unpublished works. The term of copyright protection is the life of the author plus an additional 70 years. For works that qualify as a “work-for-hire” and anonymous or pseudonymous works, the duration of copyright is 95 years from publication or 120 years from creation, whichever is shorter.
Under US copyright law, the owner of a copyright has the exclusive right to:
Copyrights may be registered with the U.S. Copyright Office, although such registration is not required to establish copyright ownership.
Copyright protection also gives the owner of the copyright the right to authorise others to exercise the exclusive rights listed above, subject to certain statutory limitations. If an individual violates the rights of a copyright owner, the owner may file a copyright infringement lawsuit in federal court. The Copyright Act allows for monetary damages, including statutory damages.
Trade secrets are confidential information that may include formulas, methods, techniques or processes that provide their owner an economic advantage over competing firms that do not know the secret. The confidential nature of trade secrets gives the owner protection for as long as the secrets are kept private. However, protection ends once a trade secret becomes available to the public. Trade secrets were traditionally protected by individual laws of the various states in the US, and the federal government recently enacted the Defending Trade Secrets Act, which now gives trade secret owners a federal cause of action for misappropriation.
The owner of a trade secret can enforce its rights through various lawsuits, such as for theft or improper disclosure of trade secrets. In order to win a trade secret lawsuit, the owner must show that the information qualifies as a trade secret and confers a competitive advantage over the competition. The owner must also show that reasonable efforts were made to maintain the necessary secrecy in accordance with applicable state law. Unlike patent infringement, liability related to trade secrets requires an intentionally improper act – ie, the owner must show that the trade secret was obtained through fraud, theft or bribery. Courts may order parties that misappropriated trade secrets to maintain the secrecy and to provide financial compensation to the owner.
In the USA, there is no single uniform law governing data privacy and data security, and no regulatory agency or body responsible for its enforcement; instead, a patchwork of federal, state and local law convenes to form a body of protections. Therefore, the level of privacy and data security afforded to consumers and required for corporations will vary greatly by jurisdiction and by industry.
Federal Trade Commission Act
In general, except for certain sector-specific privacy (eg, related to health information), federal regulation of data protection is governed by Section 5 of the Federal Trade Commission Act, a wide-ranging consumer protection law that prohibits “unfair or deceptive” commercial practices and is enforced by the FTC. Despite there being no specific language on the topic, the FTC has interpreted Section 5 of the FTC Act to require certain data privacy and security protections in publicly available privacy policies, such as accurate disclosures of data handling practices. The FTC Act applies to most companies and individuals conducting business in the USA, but companies in industries that are regulated primarily by other federal agencies – including certain communication, transportation, financial and non-profit institutions – may not be subject to the FTC Act.
Based on the current state of the law, the FTC might bring an enforcement action for several reasons related to a company’s data privacy and security practices. Three examples follow.
The FTC may bring various enforcement actions for violations of either the FTC Act or COPPA. The FTC can start an investigation, file a complaint in court for an injunction or damages to be paid to customers, issue a cease-and-desist letter or, in limited instances, enforce sanctions. Usually, the FTC enters into settlements or “consent orders” with companies that detail the actions that the FTC believes were in violation of Section 5 and the steps the company must follow in the future. Companies that violate these consent orders can be subject to high monetary penalties.
Other Key Federal Laws
Other federal laws regulate privacy and data security within specific industries. The Graham-Leach-Bliley Act (GLBA), for example, regulates the collection, use, protection and disclosure of non-public personal information (NPI) by financial institutions. The GLBA requires financial institutions to provide a written description of their sharing practices and enables the customer to opt out of certain such sharing practices if they do not wish to have their information shared.
The Dodd-Frank Act adds additional data security action within this industry and is primarily enforced by the Consumer Financial Protection Bureau. Actions required for compliance vary greatly by circumstance, and companies entering the USA should seek counsel with regard to GLBA and Dodd-Frank compliance if they are engaged in the provision of financial products or services.
The Health Insurance Portability and Accountability Act (HIPAA) governs data protection in the area of health data and is enforced by the Department of Health and Human Services Office for Civil Rights. Companies that handle medical, genetic or health information in the USA should seek counsel with regard to HIPAA.
A myriad of other federal laws govern aspects of data protection by specific industry or data type, including:
State Data Protection Laws
Many states add additional requirements to the federal statutes discussed above, so companies should research the applicable laws before conducting business in new territories. For example, California, Colorado, Connecticut, Maryland, Massachusetts, New York, Utah and Virginia have unique data protection laws, while Maryland, Massachusetts and New York require any company that stores residents' personal information to adopt reasonable security requirements.
California has one of the most protective privacy and data security laws in the USA, and became the first state to pass a comprehensive consumer privacy law when it enacted the California Consumer Privacy Act of 2018 (CCPA). The CCPA provides consumer rights for personal information protection and imposes stringent data protection obligations on numerous entities conducting business in California. These entities must, inter alia, update privacy notices, provide choices to consumers on selling personal data, and allow consumers to access and delete their data. The CCPA also contains a private right of action that allows consumers to seek monetary damages from companies for data breaches involving certain sensitive categories of personal information. The CCPA became effective on 1 January 2020.
In November 2020, a California referendum to amend the CCPA, known as the California Privacy Rights Act (CPRA), passed by popular vote. The CPRA will take effect in 2023, significantly expanding the CCPA with the introduction of additional rights concerning targeted advertising and sensitive data processing.
Following the CCPA and CPRA, similar consumer privacy laws have been enacted in Colorado, Connecticut, Utah and Virginia, all of which will come into effect throughout the course of 2023. While these laws share similarities with the CCPA, the CPRA and each other, there are some key differences that affect:
For example, in Colorado, Connecticut and Virginia, companies must obtain opt-in consent from consumers prior to collecting “sensitive” personal data from them – this category of personal information is borrowed from the EU’s GDPR, and includes details about a person’s ethnicity, religion, citizenship, precise geolocation and other categories of data. Companies looking to conduct business in these states should consult with counsel to ensure compliance with these new laws.
Unlike many other jurisdictions (eg, the EU), with certain limited exceptions related to defence and other classified or highly sensitive information, no single law prohibits personal information from leaving the USA, and there is no uniform law against sharing personal information with external nations. As such, there are relatively few limits on transfers outside the US. The FTC, however, asserts that data protection laws still ought to be enforced when protected information crosses the border. For example, the FTC may sanction non-compliant companies doing business in the USA and collecting data on US citizens.
There is no central government agency in charge of enforcing all data protection laws in the USA. Of the various regulators within this space, the FTC has the broadest authority despite having no specific guidelines on data storage or privacy. Congress has frequently considered the formulation of a new agency with a comprehensive and uniform law, but none has gained traction and those proposals have failed so far.
With the recent adoption of new state laws, however, we are seeing the creation of new, state-specific data protection regulators. For example, the CPRA established the California Privacy Protection Agency, a new state government agency that has broad authority to enforce the terms of the CPRA.
Employment Law and Special Measures to Address COVID-19
Federal, state and local governments have passed new laws providing for increased protections for employees, to address the impact of the COVID-19 pandemic. In addition, the resulting rise in remote work has led to a renewed focus on compliance with various employment laws, including, without limitation, laws pertaining to wage and hour, leave management, disability accommodations, workers’ compensation and unemployment insurance.
The FFCRA was passed in March 2020 and required employers with fewer than 500 employees to provide COVID-19-related paid family leave and paid sick leave, and established corresponding tax credits. FFCRA leave expired by its terms on 31 December 2020, but the Consolidated Appropriations Act of 2021 permitted covered employers to provide leave on a voluntary basis until 31 March 2021 and, in return, still qualify for tax credits.
ARPA extended the employer option to continue to provide qualified leave and receive a corresponding tax credit for such paid leave taken by employees until 30 September 2021. It extended the period during which tax credits were available to eligible employers (with fewer than 500 full-time employees) that voluntarily provide paid sick and family leave from 1 April 2021 until 30 September 2021. Employers can still receive a 100% tax credit for qualified wages paid during leave provided for up to ten days of paid sick leave, up to USD200 or USD511 per day (depending on the reason for leave).
ARPA extended the unemployment benefits that were available under the March 2020 CARES Act, as extended by the December 2020 Consolidated Appropriations Act, until 6 September 2021. It also extended the earlier created pandemic unemployment benefits by providing for up to 53 weeks of additional unemployment benefits to eligible individuals who have exhausted the unemployment benefits available under state law. With ARPA’s extension, eligible recipients in many states can now receive up to 79 weeks of benefits. ARPA further extended the supplemental USD300 per week benefit until 6 September 2021.
In addition to the paid and family sick leave required at the federal leave, many state and local governments enacted laws or expanded pre-existing leave laws to require employers to provide paid and unpaid sick and/or family leave to employees for leave necessitated by COVID-19.
Given the general availability of the COVID-19 vaccine and the surge in variants around the USA, the federal government and many state and local governments have also implemented laws mandating vaccination in the workplace, subject to exemptions for disability and religion, or weekly COVID-19 testing as an alternative to the vaccine. For example, the Centers for Medicare & Medicaid Services (CMS) Interim Final Rule required all workers in healthcare facilities participating in Medicare or Medicaid to become fully vaccinated by 4 January 2022. Other measures adopted by state and local jurisdictions include mask mandates and social distancing requirements.
In an effort to counter some of the above-referenced measures, a number of states and localities have also issued orders or laws prohibiting private employers from mandating the COVID-19 vaccine or limiting their ability to implement such mandates.
Ultimately, when determining how to comply with their legal obligations and address the safety concerns related to COVID-19, employers must consider federal, state and local laws, directives and orders along with the particular needs of their business.
The Biden administration has circulated numerous proposals that have the potential to significantly change several aspects of the US tax landscape. Democratic control of the White House and both houses of the US Congress suggests that some degree of change is likely. The numerous proposals include:
There are several major antitrust legislative reforms presently under consideration by the United States Congress, including:
The Trademark Modernization Act (TMA) was part of the 2,000-page Consolidated Appropriations Act of 2021. Among other things, the TMA amends the Lanham Act to apply a rebuttable presumption of irreparable harm to Lanham Act claims. This legislation provides for new ex parte re-examination proceedings and expungement petitions for a trade mark registration on the basis that the mark has never been used in commerce nor in connection with some or all of the goods or services recited in the registration. The USPTO is required to issue regulations to carry out the ex parte expungement and ex parte re-examination sections of the TMA no later than 27 December 2021.
In addition to California, Colorado, Connecticut, Utah and Virginia, as discussed in 8.1 Applicable Regulations, many state legislatures have considered consumer protection laws in the past year, including several that are under active consideration at the time of writing.