In prior blog posts (see here, here, and here), I described how we have been fielding regular inquiries regarding international cannabis, both from companies inside the U.S. looking internationally and from international companies looking to the U.S. market. This post deals with state governance and geography issues for international companies seeking to enter the U.S. market.
U.S. State Governance
Even though the U.S. federal government has primary jurisdiction over certain areas (e.g. food, drugs, certain securities, some criminal matters etc.), each U.S. state and territory has its own set of laws governing other areas (e.g. business entity formation and licensing, employment laws, and other criminal matters).
Some states, like Delaware and Nevada, are considered very “pro-business,” meaning that the state governance framework of laws, regulations, and enforcement of those laws and regulations allows businesses wide latitude on how they conduct their business operations.
Other states, like New York and California, tend to heavily regulate businesses, and that tendency is reflected in the time, expense, and complexity in forming a business, through to the applicable regulations governing the business from the time it is set up. These states often favor employee rights (e.g. non-compete agreements are virtually unenforceable in California, and its state employment tax and insurance requirements are heavy).
Depending your home country’s regulatory environment, international companies setting up operations in the U.S. tend to want as little regulation and as much flexibility as possible. Of course, there is natural tension between wanting to be in a strong consumer market like California, having access to talented employees, and not wanting to be subject to all of the regulations in a market like California.
Every international company will have to decide the geographic location that provides the proper mix of proximity to attractive consumer markets and an attractive business regulatory environment.
Adding cannabis considerations to the mix turns some of these decisions upside down. Some states that are conservative regarding cannabis as marijuana are extremely progressive regarding cannabis as hemp, in large part because they are states steeped in a culture of agriculture.
For many months our firm has prepared a 50-state risk matrix to examine how each U.S. state treats hemp-derived CBD products: consumables, smokables, and cosmetics, in order to help our CBD- and other cannabinoid-focused clients make the crucial decisions of (a) where do we form our business entity and (b) where do we actually do business?
Entity Choice and Formation Location
Deciding what type of entity to form and where to do business is always a foundational decision, and happily all 50 U.S. states provide nearly identical entities. Corporations and limited liability companies (LLCs) are the most common types of entities used, and each has its advantages and disadvantages.
For instance, LLCs provide much more flexibility than corporations and are subject to only a single layer of taxation, but LLCs are generally less attractive for international companies that do not want to subject the foreign parent company to U.S. tax reporting obligations. If a foreign parent company wants to seek local investment partners or has plans to eventually take the U.S. business public, then a corporation is generally more attractive. And if the foreign parent intends to set up an investment fund, then utilizing a limited partnership is often still the norm.
As you are looking at the east coast vs. west coast population spreads, with some critical hubs in between, remember that you can easily and quickly set up a business entity in most U.S. states. And generally, you will not need to form more than one U.S. entity until you have a good reason to do so. If you will be operating in more than on U.S. state or will be operating in a U.S. state that is different from the state of formation of your business entity, then you can simply register your business in one or more other U.S. states.
Where you do business matters because many states have “minimum contacts,” which means that if you have some minimum contact with that state (e.g. marketing or selling products), you are considered to be doing business in that state. Once you determine the ideal geographic scope of your business, you need to determine whether you need to register to do business in each state, even if, for example, you are only storing products and conducting e-commerce in that state.
Each state will have a different set of laws and regulations on the issue of minimum business contacts. This is also true regarding states where you have one or more employees working on your behalf. It matters how much work and what type of work the employee is doing in the state or is targeting at the state.
Which State to Choose?
Some U.S. states have no business income tax, making it attractive to businesses, and no personal income tax, making it attractive to employees. Other states have extremely good international trade centers with state government mandates to help international companies settle and do business locally– including helping foreign companies access lenders engaged in international business and eager to do more.
Not all states are created equal. Some states’ international trade centers really understand international business. Others do not. It is your job to find the right place the first time around.