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Getting Your Foot in the Door: Incorporation in the USA

Updated: Mar 13

We’ve already discussed why the US makes sense for any emerging tech service startup or even a more seasoned player looking to market for long-term growth. It’s the world’s biggest economy backed by the world’s third-largest population, with a mindset open to embracing both new technology & newcomers and a mature ecosystem designed to facilitate business growth.

So how do you get started? That’s what we’ll dive into in this article. Your first step to doing business in the United States is by becoming legal: incorporation. Not only does incorporation give you the legal authority to do business in the country, but it also primes you for access to bigger & better opportunities. Let’s take a look at the essential components of incorporation and how to manage them successfully.

Corporate Structure

Your journey for doing business in the US starts with incorporation. There is a lot of debate around the best incorporation structure. Bear in mind that any decision you make here is going to be impactful but reversible - even if with some additional effort. So while we will share our opinion, what’s most important is not to get too hung up on how you want to incorporate.

The first question you’ll face is LLC vs Corporation. LLCs are simpler but you can find standard documents that will be good enough. In the future, if you’re looking at investment, you’ll likely need to convert to a corporation. So we recommend just starting there.

The next question is a taxation question with a C-Corp vs an S-Corp. C-Corps have the disadvantage of double taxation that you can avoid if you are an S-Corp. But this is a question about your ambition. If you plan on running a fast-growing company, you won’t make much cash. So you will likely never be double-taxed. In addition, a C-Corp has a secondary advantage of qualifying for QSBS so if you plan to grow quickly and exit then the tax benefits of QSBS make a C-Corp a no-brainer option.

Corporate governance and by-laws are important, but at this early stage they will be inconsequential. By the time they are consequential, you’ll need to make more decisions regarding the company. We highly recommend using a service to incorporate for you and use the standard incorporation agreements that they provide. This will likely be sufficient for your needs to start with.

The last part is where to incorporate. Please be aware that you must register and pay a franchise tax for any state you wish to hire in and at times are doing business in. That means you have an incentive to incorporate in your home state. But you should consider the corporate income taxes for all states. Delaware, Wyoming, Nevada, New Mexico, and Texas are some of the most commonly incorporated states. Picking any of these will be good enough.

Intellectual Property Assignment

By the time you formally incorporate, the founders may already have some IP. At the time of incorporation, especially if you have founders involved in the business, you need to transfer the corporate IP to the corporation. The IP includes patents, trademarks, copyrights, domain names, and any other property integral to your business continuity.

By securing the company's ownership of these assets, you will shield your business from potential legal disputes (especially if any of the founders choose to exit). You will also add to its acquisition value since companies that own their own IP are far more attractive options for investors.

Stock Purchase Agreement and Restricted Stock Agreement

Next, it’s time to look into the Stock Purchase Agreement (SPA) and Restricted Stock Agreement (RSA). These agreements define the ownership structure of the company.

The SPA outlines the terms and conditions for selling shares to investors or founders. This agreement specifies the purchase price, payment terms, and any accompanying warranties.

Accompanying the purchase of the stocks is the RSA. The RSA protects all the shareholders and the company in by accounting for contingencies. People who have worked in large tech companies are familiar with Restricted Stock Units (RSUs). RSA serves a similar purpose.

The primary function of an RSA is to impose a vesting period in the form of a clawback on the issued shares. There are two reasons founder shares are covered under an RSA and not issued as RSUs. The first is the company needs the founders to be shareholders to have voting rights in the company. The second is that the vesting of an RSU is a taxable event and it can easily create a tax liability for a founder that they don’t have the money to pay in exchange for receiving an illiquid asset. This can create an impossible situation for the founder.

A good RSA needs to handle at-will termination, with-cause termination, death, divorce, disability, and dismemberment. A standard vesting schedule is 4-year vesting with a cliff at the first-year mark and monthly vesting afterward.

Shareholder and Board of Directors (BOD) Consents

Your corporate governance documents and your state’s business laws will require certain shareholder and Board of Director consents to be approved for the initial signing of the documents.

Decisions made at the shareholder and Board of Directors’ levels must be formalized by obtained consents. These consents act as legal documentation, offering protection against disputes and providing assurance that the company’s actions align with its strategic objectives.

Wrapping Up

The birth of a new corporate entity is a matter of some delicacy because of the need for careful attention to legal details. The good news is that the US makes it a fast & straightforward process. With the right legal counsel and a systematic approach toward crossing off components from the incorporation checklists, most companies are established and ready to do business in as little as two weeks.

If you haven’t already, we recommend you take the plunge and set up a corporate entity for your business in the US to open up new routes into the vibrant American IT market. And if you’re wondering where in the US, here’s why we recommend Texas.

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Please note while this article includes legal and tax information, we are not professionals in those fields and are not providing legal, tax, or financial advice.

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