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When to incorporate a business in the US: cost and expenses for startups

When to incorporate a business in the US: cost and expenses for startups


You’re an entrepreneur and you want to start your US company. You found this online platform that handles Everything for you for five hundred dollars or so. Should you go for it? Should you incorporate it? That’s what we’re gonna look into today. So as for incorporating a US business, we’ll be discussing: So when’s the right time to you know to get the responsibility of owning a corporation. An overview of how the process works and the steps you need to take, and the compliance costs of owning a company in the US. For foreign founders we also add some notes on the extra costs and logistics required if you are from outside the US and want to incorporate a US business. I am NOT a lawyer. I’m sharing this from the entrepreneurs perspective and the stuff that we’ve had to go through with our company Slidebean. So, please consult with your lawyer for any details and do not take my word for it. Alright, so most companies are incorporated as C corporations. The second rather common alternative is an LLC or the limited liability corporation. Just as a reference an LLC is a type of company organized under an operating agreement. Which is a contract between the owners, in this case they’re called members, not shareholders. It specifies how it’ll be run and how the company economic burdens and returns will be split between the partners. They don’t function with shares as we’re normally familiar with. Today we’ll really be focusing on C corporations. In our experience with investors and with accelerators. Most of them will want to invest on Delaware c-corporation. So if your plan is to raise venture capital that’s probably the way you want to go. A C corporation is an entity designed to act as an abstraction layer between the operators of the business and the owners of the business, who may or may not be involved in day-to-day business activity. The power of a C Corp is that it generally separates liability from the business owners and the company itself. Ownership is tracked by shares, with each share corresponding to a defined portion of control of the business and entitlement to the economic upside of it. So dividends the company generates are split between share ownership. We made a whole video about how shares work. You can check it out here. The state of Delaware has a highly developed body of law governing corporations which can lead to a high degree of predictability in the event of a legal dispute. This is why most investors prefer Delaware C corps. It’s just a company structure that they can easily understand that most people are familiar with. You, of course, don’t have to be in Delaware to do it. In most cases this is handled through an entity that acts as your registered Delaware address and simply forwards your mail. Here are a few pointers: First, clarity with your co-founders. We talked about founder agreements last week. You can check out that video. While those agreements can be put on paper first, as your product and your company increase in value, you’ll need to have them in full legal writing and it’s really a legal corporation the best way to do it. Number two: It allows equity ownership and compensation, and that’s not only for founder shares but for early team members. You will want to define an option pool for them to compensate them for taking a risk with your early-stage company. Intellectual property: if you’re developing code that code belongs to you. Unless you have a contract that says it belongs to the company you work for. By creating a C corporation you can ensure that all code generated by you or by your employees is owned by the company and not by that person. This is really important when founders split up. If the corporation is sued then the assets of its founders and investors and any other shareholder are more likely to be protected. And then it enables investment. You will probably not be able to raise money to your name. It needs to be put into a corporation. When is the right time to do it? This is gonna relate mostly to cost. While incorporating normally costs around $500, you need to pay around 500 to 800 dollars per year in state fees. Furthermore, you need to be compliant with accounting and tax filings, depending on which states you’re doing business. As a foreign founder, the US tax system scares the hell out of me. So we pay good money to ensure we are compliant. These fees are going to be at least $1,000 for a year. For a rather inactive corporation, and as you ramp up revenue and expenses that can go up. That is, expensive, of course, if you’re not generating revenue and funding the business yourself this could be a lot of money that could be going elsewhere. Our operation, which is over 1 million dollars a year in annual expenses, (you can go watch that video) pays around 18,000 dollars a year for bookkeeping and tax filing. So if I were to start a new company today, I would wait to file for incorporation until we’re ready to start charging customers. Before that I recommend handling these agreements directly with your co-founders. If you’re close to raising money, then of course you’ll need to incorporate. But, most companies these days are raising their seed round after having a decent amount of revenue. Let’s go into the process. The process of an incorporation is rather straightforward and we laid out everything on our platform FounderHub. We built that specifically to help founders navigate this straightforward, but complicated process. Number one: filing takes about a day. You’ll receive your stock certificates and a copy of your certificate of incorporation. The filing process costs around five hundred dollars with most providers. Number two: you’ll want an EIN number, which is your company’s tax ID and it lets you hire people. Number three: you’ll need to define a Board of Directors and company bylaws. The bylaws are the rules of the company so for example, it’ll determine which decisions or expenses can be approved by the CEO, the executives, versus which decisions require board majority or even unanimous board approval. Bylaws are all rather standard and are normally included with the incorporation, but we have a template you can download for reference. Four: you’ll need to define share ownership and vesting as I said we talked about this in our Stock Video and in our Founder Agreements video. Number five: very important if you’re vesting stock, you’ll need to file an 83-b election form. This form basically says that you will pay taxes for your shares now, that are probably worth very little, and therefore don’t have to pay for them as they vest. The advantage is that the company valuation today is small compared to a potential investment at a higher valuation. Number six, and finally: you’ll want to sign a Restricted covenants agreement between the founders. This document assigns all intellectual property to the company. It also works as a confidentiality agreement between the founders and it prohibits them to go work for a competitor company. It’s a standard agreement you need to have to protect yourselves and your first investors will certainly want to see that in place. As I said, we have details on each one of these steps as well as document templates available for free on our FounderHub platform. You can check that out at founderhub.io. Now, if you’re based in the US, you can probably stop watching now. Let us know what other topics you’d like us to cover and hit that subscribe button to stay tuned. If you are from outside of the US this last part is for you. I am originally Costa Rican, so I’ve had a crash course on the US tax and legal system. Alright, so some quick points over here. Do you need a US company versus a local company? It really depends on your business. If your product is global and you want to build customers around the world, it’s expected for those credit card charges to come from the US. Number two: charging credit cards as a US company is very very easy. Stripe and Square are two companies that have really perfected that model and they only allow accounts for certain specific countries including, of course, the US. So if you’re looking for US investors or you’re planning to raise from investors from multiple countries, they can probably all agree to invest in a Delaware C-corporation versus an entity belonging to one specific country. It’s all about being familiar with that legislation. Then, startup mechanisms such as vesting stock option pools and convertible notes. Not all countries have legislation or mechanisms in place to handle these agreements. While it’s all quite standardized in the US. Another common question is on the requirements to filing for a US Corporation. Yes, you can incorporate a US company without setting foot in the US. Companies like stripe Atlas let you do that remotely and even set up a bank account for you. You don’t need a physical presence or even a visa. But, you probably want to make sure that you can get into the country where your business is based. The extra cost of being a foreign founder is mainly Your mail forwarding fees, and that really depends on the country, and then some extra tax forms mainly the 5472 tax form. Which is one that you need to file for every foreign founder with over 25% ownership on the company. Finally your US corporation can easily be the parent company of a foreign entity. If you have staff operations in a certain country, you’ll probably want to use this model to centralize everything on the top US company and still be compliant with other local legislation. All right, so that’s that on incorporation. I hope this was useful to you. If you have any questions drop them in the comments and we’ll try to answer to the best of our abilities. Once again, check with a lawyer for more advanced questions. Thanks for watching. Hit that “subscribe” and we’ll see you next week.

  • LLC is a “Limited Liability Company” haha notice you said corporation but probably just a mix up lol it acts with limited liability as a corporation but itself is not a corporation

  • if you want to be a DE C-corp, check out shoobx.com to help you deal with the ongoing needs of running the company (you can also incorporate there)

  • I always hate that part about non-compete clausules. Comapny "protects itself" which sounds nice until you are the one who is leaving. Imagine you are a CTO with expertise in a specific niche technology and you sign agreement with non-compete clausule.

    If something goes wrong and your CEO will fire you, what are you going to do next ? You are tech. expert in specific niche industry and now you cannot compete with your original company. Anything you could possibly do in your field could be considered as competition even if you would only get a regular job (at competition company).

    So I don't think this has anything to do with "protection" it's unfair business practice that can get you out of job or business for life. It's nobody's business what I am going to do with my life after leaving the company. Everybody should have the right to start over.

    However maybe I don't really understand deep enough how this really works, I would be appreciate some more information about this topic.

  • We have incorporated the company in our country outside US. If one day we need to move to Delaware C Company, can we move the company to US? Is it the same with filing new company?

  • On the founderhub.io website, the privacy policy is not able to be opened when signing up. Can I access this somewhere else?

  • I have a question, if I'm a foreign personal, and want to establish a LLC subsidary in Delaware, but keep my HQ in my country of Origin, can that work?

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