What firmly shapes your startup success is your legal framework.
Many talented entrepreneurs around the world aspire to launch their businesses in New York, Silicon Valley, Austin, and other American IT hubs. This goal is quite understandable and perspective.
Check out 10 reasons to start a business in the U.S. right now in our article (in Russian/Ukrainian language) here.
Incorporating a company in the United States was a topic of our presentations made at the following events in Kyiv, Ukraine.
- Business Management: Legal Instruments in Ukraine, EU, and U.S., held by Bot&Partners and UNIT.City on August 9, 2018, as illustrated here:
- Kyiv Startup Week 2017, held by Techstars on September 18-22, 2017, as illustrated here:
On both of these events, we, in particular, presented on how to start a company in the U.S. As participants expressed a sheer interest in this topic, here is a summary of our presentations.
If you prefer not to start a business from scratch, nevertheless, check out how to buy a business in the U.S.
The U.S. is indubitably one of the most favorable jurisdictions for startups according to various rankings. The U.S., specifically, avails itself of the following advantages:
- Top-3 country for entrepreneurship, based on the Best Countries Entrepreneurship rankings;
- Two of the the most high-tech cities in the world, pursuant to Business Insider;
- First three places in the list of the best cities in the world for tech, according to Savills; and
- Seven (i.e., 35%) out of 20 best cities in the world for startups, as per Startup Genome.
No wonder that the leading technology companies, such as Apple, Google, Microsoft, Facebook, Amazon, Uber, Airbnb et al are all incorporated in the U.S. Sure thing, each of these giants once was just a startup.
From a legal perspective, check out the benefits of using the New York law.
Why would you incorporate your startup?
Incorporation allows you to:
- limit your personal liability;
- contribute property (including IP) into business; and
- gain corporate rights in the company.
Incorporation essentially separates your business from you.
Generally, the state to incorporate in should be the one where the company will conduct its activities. If the company runs its business in various states, it should normally get an authorization in all those states.
The most popular states for incorporation are Delaware, Nevada, and Wyoming.
Notably, around 66% of all Fortune 500 company are incorporated in Delaware. This is largely due to that Delaware has a highly developed corporate law – particularly landmark court decisions – on major corporate matters.
The Delaware law sets a high bar for shareholder suits. It thus mainly favors management. In contrast, the New York law largely favors shareholders.
Interestingly, Delaware ceded its 15-year-held top spot to South Dakota by “lawsuit climate” in the states, pursuant to a recent poll conducted by the U.S. Chamber of Commerce.
Nevada and Wyoming, in turn, have no state income tax.
Legal Forms of Business
American businesses usually take either of these four forms:
- Limited liability company (LLC);
- Partnership; or
- Sole proprietorship.
Most practicable are the first two. So, compare LLC and corporation.
Corporations can be of type C or S.
C-corpooration is a regular corporation, while S-corporation is a small one.
S-corporation is subject to the following limitations:
- Up to 100 shareholders;
- Only individuals as shareholders; and
- One class of stock.
None of these limitations apply to C-corporation, though.
LLC and S-corporation enjoy a pass-thru taxation. This means that the income is taxable only at one level – members/shareholders. C-corporation, in contrast, is subject to double taxation. This means that the income is taxable at both levels – corporation and its shareholders.
Importantly, regardless of which state you choose to incorporate in, you will have to pay taxes in the state/s where you actually conduct your business.
Registering a company in the U.S., you may be able to keep your name and address private. In other words, you may keep the company owner/s undisclosed in public records. For this purpose, you should use a third person as your company organizer and filer. This person may, for example, be an attorney who incorporates your startup.
Depending on its form, your company will have certain constituent documents. A corporation would have a certificate of incorporation, shareholders’ agreement, and bylaws. An LLC would, in turn, have articles of organization and operating agreement.
Preparation of these documents, especially the agreements and bylaws, is by far the most crucial and time-consuming part of incorporation.
The constituent documents should provide for, among other things:
- Transfer of inventions, including those created in the future;
- Convocation of shareholders’/members’ meetings;
- Meeting quorum;
- Number of votes necessary to adopt a resolution, using supermajority (e.g., 2/3 or 3/4 of votes) for crucial matters; and
- Amendment of constituent documents.
Startup founders often overlook these important provisions. It is only after they run into a legal trouble that they realize the significance of those provisions.
The U.S. legal framework for corporate relations is very flexible. Corporate documents, specifically, may fix virtually any economic arrangement between shareholders/members, directors/managers, and company. This especially relates to LLC. You may, for example, prescribe a disproportionate allocation of membership interests.
The U.S. corporate law, therefore, allows for creativity and individual approach.
Registration timeframes basically depend on the state and form. It is usually possible to incorporate a company even within a day. Preparation for that, however, requires time. It may, for example, take several days to draft relevant shareholders’ agreement or operating agreement.
Registration fees depend on the state and form, too. An NY LLC registration fee, for instance, amounts to $200, coupled with the publication certificate filing fee of $50. In comparison, an NY corporation registration fee amounts to $125.
Opening Business Bank Account
Having incorporated your company and obtained a federal tax ID number (EIN), you can open your business bank account in the U.S.
Then, remember to use your company accounts for business, rather than personal, purposes. Otherwise, commingling your personal and business funds may deprive you of the liability limitation. This is where the doctrine of piercing the corporate veil kicks in.
Piercing Corporate Veil
With your startup incorporated, your personal liability is limited to your contribution.
Is this limitation absolute?
In certain cases, courts may apply the doctrine of piercing the corporate veil. It renders the owner/s personally liable for corporate obligations. You may, in particular, be personally liable if you:
- defraud or avoid your existing obligations;
- undercapitalize your company; or
- act as your company alter ego.
The latter scenario applies in the case of a serious lack of corporate formalities. You may, for example, be deemed an alter ego of your company if you:
- commingle corporate funds with your personal funds;
- use corporate funds for your personal benefit; or
- do not hold meetings or consistently make decisions without meeting or voting.
These actions may ultimately deprive you of the liability limitation. So, take care of your corporate formalities.
Liability of Directors
Directors generally bear no liability for the company obligations.
Moreover, the so-called business judgment rule basically protects directors from liability for failures of their business judgements. Courts normally refrain from second-guessing those judgements.
The directors, at the same time, bear fiduciary duties to the company. They, in particular, include a duty of care, duty of loyalty, and duty of good faith. Breach of any of these duties may subject director to personal liability.
A reliable option to protect directors from liability is using expert opinions as grounds for their business judgements. An example of such an opinion is a legal memorandum.
Protection of IP
From the outset, protecting your intellectual property is your top priority. This especially relates to your patents, trademarks, copyrights, and domains.
Also, if the founders contribute their IP into the startup, it is vital for the company (instead founders) to own that IP.
Once you incorporate your startup, be sure to register your trademark.
As you establish your American business, you likely plan to move to the U.S., unless you already live there. As an alien, you need a relevant U.S. visa. The most common American visa options are B1/B2, H-1B, L-1, EB-5, and E-2.
Depending on circumstances, the E-2 (U.S. treaty investor) visa appears to be most appropriate for a number of reasons. E-2, namely:
- Allows you as an investor and your family to live and work in the U.S. for as long as your business lasts;
- Is not subject to any visa quota, unlike H-1B;
- Allows your spouse to work for any company in the U.S.;
- Does not require investing as much as $500,000 or more, unlike EB-5;
- Allows for an unlimited number of extensions of up to two years each; and
- Is largely independent of external factors, compared with H-1B and L-1.
Availing yourself of these benefits, you can move to the U.S. as a treaty investor.
Can you incorporate by yourself?
You can, of course, register your company on your own. If you lack legal or accounting/tax expertise, however, you would be way better off engaging a U.S. attorney and CPA. Professionally crafted documents will make a huge difference for you and your business partners, investors, lenders, and acquirers.
Both the attorney and CPA should be licensed in the U.S. Hence, remember to check your attorney license.
To help yourself incorporate your startup properly, follow our business setup checklist.
For an ultimate guide on how to open your business in the U.S., see our webinar (in Russian).
Besides, check out how to invest from Ukraine into the U.S. (in Russian).
If you already own a business, learn how to defend your company against a hostile takeover.
See you at our next presentation!