August 15, 2018 | 6-minute read (1013 words)
Wouldn’t it be nice if there was a simple checklist for growing your startup? The information online is endless, and you’ll hear conflicting advice on just about every subject. Some hold strong opinions on whether or not a startup needs to incorporate in the US to be successful. At Early Growth Financial Services, we don’t take a stance on topics like this. We advise what makes the most sense for each client’s needs.
EGFS Director of Operations Kristina Rivera-Rasmussen said, “We take pride in being values-based and working selectively to stay at the forefront of accounting by being aware of anything our clients can benefit from.” When you’re trying to scale your business every aspect of your strategy is inter-connected, and it’s better to be proactive by considering the big picture. Whether or not you decide to incorporate in the US is certainly a decision that must be considered from all angles.
Indicators for Considering U.S. Incorporation
London Founding Partner of Wilson Sonsini Goodrich & Rosati, Daniel Glazer, has a three-part series that will help you decide if incorporation is right for your company. Speaking strictly from the UK perspective, his analysis is a good starting point if you’re unsure about what’s right for your company – regardless of where you’re based. Glazer also summarized the following as the main reasons to consider incorporating in the US:
- Employees – Employment laws vary greatly. You can eliminate a lot of uncertainty by having a US entity for your US-based employees.
- Immigration – Some US visas require a US entity.
- Revenues – It can be tax-efficient to operate as a US entity if your company is generating revenue in the states. It’s also possible to allocate a portion of your business to a US entity through transfer pricing arrangements and tax sharing agreements.
- Commercial contracts – Outside of laws and regulations, some US companies simply prefer to transact with other US companies. Government contracts may require it.
- Bank account – It is much easier to open a bank account in the US as a US entity. Referrals are extremely helpful, even after you’ve incorporated.
- Litigation risk – When operating in a space where US product liability, patent infringement, or other litigation claims are frequent, it may be worth establishing a US company.
- Regulatory requirements – Heavily-regulated industries like healthcare may require certain types of US operations to be run through a US entity.
- Crowdfunding – Many US crowdfunding platforms only serve US entities.
US VC investors – US VC investors are more likely to invest early-stage capital into a foreign entity if they have a strong “US story” (think US operations, US traction, and/or a founder or other senior decision-maker in proximity to the investor). This is not always the case.
- Accelerators - Often US accelerator programs only accept US companies into their cohorts.
If it looks like US incorporation is the right move (and it’s the right time) for your startup, you then have to decide whether to operate as a US subsidiary or create a US parent company. Tax rates in the US are often higher, but because many US VC investors prefer to invest in US entities, we see the latter more often.
The Delaware “Flip”
You’ve likely heard this term before referring to a company “flipping” from an entity in one country to a US entity. Most companies choose the state of Delaware for this due to its robust corporate laws, which tends to make the process – and any subsequent needs like litigation – much easier. Don’t let any controversy from the US deter you. It is perfectly legal to set up your company in Delaware and operate elsewhere (i.e. most Silicon Valley startups).
Now that this has become standard practice, there is a long history of businesses in the state, which equates to a long history of various scenarios. There is a lot of legal precedents to lean on. At the same, this pattern just makes it easier for anyone involved because they are so familiar with Delaware’s laws and regulations. Disrupt industries and markets, not your company’s legal structure.
As we’ve stated throughout this article, every situation is unique and that’s where we’ve made a difference for many clients. Our team is keeping an eye out for laws, regulations, etc. that could put you in a better position to reach your financial goals. We can work with you to consolidate your accounting, think through payroll and HR solutions, and offer bank referrals.
Once you’ve made the decision to make “the flip”, getting started with the incorporation process is fairly simple and inexpensive. First, you need to decide if you will be a C-Corp or LLC. Consider the following factors:
Once you’re set up, you’ll want to make sure you understand the differences of running a business in the US. Tax compliance is important, which includes corporate, income, payroll, sales, and Delaware franchise tax laws that must be followed. There is also strict foreign disclosure reporting under the Foreign Account Tax Compliance Act (FATCA). If you continue your non-US operations, you’ll have specific rules that apply like transfer pricing. Transactions between related parties need to be priced at an arms-length cost to be in compliance with transfer pricing rules.
We’re just scratching the surface here with the laws and regulations you’ll need to learn. Take the time to get advice from experts and set yourself up for success. So, the moment you’re legal on paper, you can start seeking investment and impacting the world with your startup.
- What are your short, mid, and long-term plans?
- What does ownership look like?
- Will you take on outside investors/lenders?
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