In the last two years, the global recession has taken a tremendous toll on many international investors who established business relationships with American companies. Unfortunately, numerous monetary losses could have been prevented if the international investor had conducted due diligence prior to entering into a business relationship with the American entity.

In my law practice, I have seen a substantial increase in the volume of cases where United States developers, investment partners, and business partners have either misrepresented the status of their entity or committed outright fraud concerning the status of their entity.

The purpose of this article is to explain the basic due diligence steps that an international investor should take to check out their prospective American business partner.

WHY ITS IMPORTANT TO CONDUCT DUE DILIGENCE

If you really don’t know who you’re going into business with, then you’re setting yourself up for disaster. For the international investor, there are many compelling reasons why its important to conduct due diligence:
1. If the entity doesn’t exist, a contract entered into with the non-existent legal entity is generally void.
2. Confusion about the name and status of a legal entity can lead to expensive legal wrangling and protracted disputes.
3. A mistake about the business entity that you’re contracting with could make it difficult – if not impossible to both protect and enforce your legal rights.
4. If you don’t have clarity about who you’re doing business with, you may transfer money to unsavory individuals that steal you blind.

AVOID CONFUSION

International investors frequently fail to obtain the exact name of a business entity. This simple mistake inevitably leads to much confusion. For example, many investors would fail to distinguish the difference between “Corporation, Inc.” and “Corporation, LLC” because it is very easy to focus solely on the word “Corporation.” In reality, “Corporation, Inc.” and “Corporation, LLC” are two separate and distinct legal entities.

The best way to avoid confusion is to (i) get the exact legal name of the business entity, and (ii) identify the jurisdiction in which the entity was created/registered.

CONFIRM THAT THE ENTITY ACTUALLY EXISTS

Legal entities in the United States are largely governed by the laws of the individual state where the entity was created and registered. If you know the exact legal name of the business entity and the state in which it was created/registered, it is easy to confirm that the entity exists and its corporate status.

For example, to determine the status of a Florida entity, go to the Florida Secretary of State’s Division of Corporations website (http://sunbiz.org). At this site you can conduct a search by the entity’s name for corporation, limited liability company, partnership, etc.

While on the site, you can also check to confirm the names of the officer and directors of a corporation, the names of the managing members of a limited liability, the names of the partners of a partnership, etc. This information is crucial for an international investor because its important to know which individuals have the legal authority to contractually bind the business entity.

OBTAIN QUALIFIED LEGAL ADVICE

Get sound legal advice. I know that statement sounds self-serving, but it is certainly not meant that way. An qualified and experienced attorney can save an international investor much heartache and huge potential losses. Having worked as an attorney since 1986, I have seen many scams, frauds, and ill-advised transactions. Like my colleagues who advise international investors on a regular basis, I know how to turn over the relevant rocks.

Bottom line – don’t get into business with someone that you don’t know. At the very least, conduct some basis due diligence to ensure that the business entity that you may do business with is the real thing and their representations are accurate.