The US has multiple levels of laws, which can be very confusing for non-US residents looking to do business here. To oversimplify a bit: federal law applies equally throughout the entire United States, while state laws only apply within the borders of that particular state. There are also local laws, which affect only that locality.
Understanding State Laws versus Federal Laws
A federal law applies to the nation as a whole and to all 50 states, the District of Columbia and all U.S. territories.
The supreme law of the land is the U.S. Constitution, which determines the powers and responsibilities of the federal government and its branches and what powers and rights are given to the states and the people. The highest legal authority at the federal level is the U.S. Supreme Court. Congress creates and passes bills, the President signs them into law. In some cases, the federal courts may review a law and may have it struck down as unconstitutional.
Federal tax law applies to all US persons, whether citizens, permanent residents, corporations, LLCs wherever located worldwide. Citizens, permanent residents and corporations are all taxable on their worldwide income, regardless of which state they are resident in.
State laws are only in effect within that particular state.
They can be either superior to or subordinate to federal law, depending on the issue at hand. State law can never reduce or restrict the rights of a U.S. citizen, but it can afford state residents more rights. Likewise, state law cannot undermine the responsibilities of citizens at the federal level, but it can assign them more responsibilities at the state level. Like the federal government, each state has a constitution that supersedes all other state laws. State laws vary significantly among the states, and the residents of one state can have more or fewer rights or responsibilities than the residents of another state.
Most business entities are created at the state level, and the laws that regulate corporate governance and shareholder rights are determined by the state of incorporation.
In order for the federal system to work, the states need to cooperate with each other.
The Privileges and Immunities Clause (U.S. Constitution, Article IV, Section 2, Clause 1, also known as the Comity Clause) requires each state to treat citizens of other states equally with its own citizens.
For business, this means that a company formed outside the state cannot be prevented from doing business in the state, unless the company intends to perform activities that are illegal within the state. A business entity formed outside the state is called “foreign,” while a business formed under the laws of that state is called a “domestic” business. In practice, the states consider a business formed anywhere outside their borders to be “foreign,” so that from New York’s point of view, a Vermont, New Jersey, Canadian, UK or Indian company are all equally “foreign” and subject to the same laws that admit foreign companies. Therefore, a business is free to find a state with favorable laws for corporate governance, incorporate there, and register to do business in other states.
When a state law affords a person more rights than federal law, the state law is legally presumed to prevail, but only within that state.
This means state law will always supersede federal law when the person in question stands to gain more from the state law. Conversely, when state law imposes more responsibility on a citizen than federal law, the person could be subject to a higher penalty for violating the state law. Environmental conservation laws, employee minimum wage laws and banking regulations are examples of situations where some state laws are more restrictive than similar federal laws.
Federal Laws — and state laws — can be very complicated, and therefore create conflicts. When conflict happens, Federal Law “wins”
A conflict exists if a party cannot comply with both state law and federal law (for example, if state law forbids something that federal law requires). The US Constitution includes what is called the “Supremacy Clause,” which says that the US Constitution, federal laws and US treaties negotiated with our countries are superior to state laws. Therefore, when a state and federal law explicitly conflict, the state law cannot be enforced. This happens when a state law expressly permits an action that the federal law expressly forbids. However, the opposite is not true. States have a right to impose more responsibility on their residents, and a state law can prohibit marijuana even if federal law permits it.
State Laws and U.S. Constitution
Because of the Supremacy Clause, state laws cannot supersede the constitutional rights afforded all U.S. citizens under federal law. No state law can abolish or reduce the rights afforded by the U.S. Constitution. For example, Article 17 of the Constitution expressly forbids forcible slavery, and declares it a right of every U.S. citizen to be free of forced servitude. State law therefore cannot allow slavery at the state level, as this would violate residents’ federal constitutional rights.