Things to consider when you register a company in the US from abroad— Start-Up Note Part 2

11 min read

By Alan Chan

Translator: Although this article is targeting Taiwanese, I found 80% of it informative for start-up founders who are interested in getting investment from the US.

Although I started my company at the beginning of this year, we only registered the entity in September. In the beginning, I thought opening a company is easy — — never thought that it could take us a month to go through the process. It was my first time registering a company in a foreign country so I was quite nervous and worried that I could make some silly mistakes. At the same time, when I was researching online, I couldn’t find any similar cases to me — Taiwanese who get investors from the US. So I guess it would be helpful to write an article about what to consider if you are opening a company in the US, for Taiwanese start-up founders who also wanted to expand in the global Market.

Photo by AussieActive on Unsplash

Time of registration

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I personally think there are only two scenarios in that start-up founders need to register a company. The first being starts charging fees from customers; the second preparing for fundraising from investors. The reason is simple: your customer is paying for your company’s product, if you don’t have a company, you can’t run a business. Even if customers are willing to transfer to your personal account, it would be a lot of risk for you as a founder, because you didn’t separate the legal entity of [you] and [your company]. Likewise, investors are investing in your company’s future, and if you don’t have an entity, the investor would ask you to open one.

On the other hand, if you don’t even have a fee-charging product, and not planning to fundraise, I wouldn’t recommend you register a company. Registering a company takes money, time, and expenses after your company is registered like accounting services, tax filing and etc. These are not essential for a start-up founder to consider at the beginning of the journey. At the very beginning, you should be focusing on making the product, talking to users, iterating the product and testing the hypothesis. You should try as much as possible to avoid things that’d waste your time and resources other than the things you are supposed to focus on.

Photo by on Unsplash

Where should you register

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Once you decided to open a company, the next question is [Where should I register it?]. My personal opinion is if your goal is to make a high-growth tech company, especially software, and you want to fundraise in the US, or you want to serve customers in the western market, or from around the world, you should set up C Corp in Delaware, US. Because most of the Venture Capital in the US will prefer to invest in Delaware C Corp. The name of Delaware C Corp has great credibility and the entity itself provide you great convenience around the world.

Translator: For more information about Delaware C Corp, check ‘Delaware C Corp vs LLC: Everything you need to know’ and ‘Why investors and VC firms prefer Delaware C Corporation’

Why do you want to fundraise from investors in the US? Other than the great eco-system of full-cycle investment, the other system is friendly for start-up founders too. During early fundraising, US companies can use a standardised investment term sheet like SAFE, which is relatively simple and risk-free. A deal can be done in one day as soon as the founder settled two numbers with investors — 1, the number of raised funds and 2, the valuation cap. If you register a company in other places in the world, you might need to discuss the term sheet with investors for several months and ask lawyers to check the term sheet. The wasted time could have been spent on polishing your product.

There are many other benefits too. Delaware C Corp can operate around the world, charging users by using services like Stripe; many issues can be sorted by digital service and you don’t need to have a lot of documents on paper. You can even use services like Deel to pay yourself from the US rather than spend time on opening a company in your home country.

Registering company in the US

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Once you decided to set up a Delaware C Corp, the next question is [how]. For most start-up founders from other countries, the easiest solution is to use Stipe Atlas or standardise service like Clerky. We chose Stripe Atlas in the end and it only took us $500 USD. Everything is provided with post-incorporation documents with great customer support. They don’t just help you on opening a company but also help you with other things like applying for EIN(Employer Identification Number), purchasing and distributing shares and submitting important documentations. If you have legal issues, you can also use cheap legal consultancies like Lawbite.

Translator: From what I have heard from start-up founders in the UK, Clerky tends to be more expensive and erroneous than Stripe Atlas. In terms of legal advice, you can also use [Rocket Lawyer](https://medium.com/@zmzlois/https%3A%2F%2Fwww.rocketlawyer.com%2F 5f54b36c-2897-4595-9c4a-63f267b2de04.md) which has offices both in the UK and in the US.

Stripe Altas would send you the legal documents required to register a Delaware C Corp via email, including a Certificate of Incorporation, Board Approval, SS-4 and Form 8821. Once you finish signing them online and submitting them, you will only need to wait for 2–3 days until you receive a notice that your company registration is completed.

After you set up the entity in Delaware, there are still a lot of things needed to finish, which are cumbersome but important. I will walk you through the details you will need to pay attention to step by step.

Waiting for EIN(Employer Identification Number)

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Opening a company means you have set up a legal entity and it will separate you, a natural entity and your company. The same as every natural entity has an identification number, every legal entity has its own unique number called EIN (Employer identification number).

Once you finish registration, Stripe Atlas would help you apply for EIN to IRS(Internal Revenue Service). In most cases, you will receive EIN in two weeks. But there are exceptions. Some founders waited for two months to receive their EIN because IRS was closed due to Covid-19. We were lucky and it only took us one week since the constraint of Covid-19 was lifted.

In the US, you will need EIN to open a bank account. You will need a bank account whenever your customer wants to pay you or investors want to invest in you, or your company needs to recruit employees or contractors. And you also need EIN to file tax reports at the end of every financial year.

Issuing shares

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After your company is registered and you are still waiting for EIN, you should start preparing share issuance. Stripe Atlas will provide you with a founder stock tool within 90 days after your company is registered.

When a company is registered, the share doesn’t belong to anyone. You and your co-founders will need to use your Intellectual Property and a small amount of capital to purchase these shares; before you purchase these shares, the founder or CEO needs to issue the shares; before the founders issue the shares, they need to authorise share issuance.

When I was registering my company, the standard option from Stripe Atlas was to give us 10 million shares. The co-founders need to purchase 8 million of them and the rest of 2 million is reserved for future employees(Employee option pool/share pool). The procedure of the share issuance roughly looks like this: The CEO or founder will sign Founder Board Stock Consent(Translator: translation might be altered in English) first, and it will include the share amount distributed to each co-founder. If the company issued 8 million shares, and three of the cofounders may decide to split it like 34%, 33%, and 33%, then each person will receive 2.72mil, 2.64mil and 2.64mil shares respectively. At the same time, the price of these shares is very low. To purchase 2.72million shares will only take $27.2 USD.

Once the CEO or founder finishes signing the Founder Stock Board Consent, Stripe Atlas would generate CSPA(Common Stock Purchase Agreement) and CIIAA(Confidential Information And Invention Assignment Agreement) for every co-founder to sign and transfer the intellectual property they have created to the company. These would include the code base, design draft and etc. Once you finish signing the CSPA and CIIAA and wait until you receive the EIN and the bank account gets opened, co-founders will need to transfer the amount of capital (ex: $27.2 USD) required on CSPA to the company bank account to finish share purchasing.

Opening A Bank Account

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Because founders can’t purchase any shares before the bank account was opened, hence why opening a bank account immediately is the next thing you should do once you get your EIN. Stripe Atlas recommended us some banks suitable for start-ups including SVB, Mercury Bank and etc. We chose Mercury Bank in the end.

The verification process in the Mercury Bank takes about one week and every co-founder needs to provide a copy of their passport. If your’s or your co-founder’s passport expired, you’d better renew one with the Bureau of Consular Affairs prior to company registration. One of our co-founder’s passports was expired and it happened to be a national holiday so the Bureau of Consular Affairs wasn’t opened. It took him 12 days to get a new passport. Plus the 5 working days with the bank, we only got our bank account after 17 days.

Purchasing Shares

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After the company opened a bank account, co-founders can start to purchase shares. There are some details you need to pay special attention to:

1.If you are wiring from your personal account in Taiwan to your US company bank account via International transfer, please remember to add notes on the wiring sheet. Mercury Bank provided a blank space for you called Remittance Information, but banks in Taiwan usually called the extra notes ‘Instructions’(Translator: difference of translation applies so you will need to pay special attention in different countries). The people dealing with your wiring in the bank might think these are two different things and forget to type this piece of information, resulting in the wiring unsuccessful. So it is important to remind them.

2. According to our experience, it’s likely you can wire successfully if you choose SHA in the section of Details of Charges, 71A(The wiring fee is paid by the sender, the fee is generated by the middle bank and receiving bank will be handled by fee receiver). If you choose OUR then it really depends on which bank you chose(Fees generated by all banks will be paid by the sender). We were worried that choosing SHA will cause the money received different from the actually wired amount but actually the amount was the same. It could be because there is no transaction cost with Mercury Bank.

Translator: for more information related to SHA, OUR, BEN, and Details of Charge, check this article.

3. Purchasing shares doesn’t mean that you actually own them. Founder Stock Board Consent has stated a clear Vesting Schedule that everyone is taking 4-year vesting with a 1-year cliff, which means you will only work in this company for a year after you get your first 1/4 share and you will receive 1/48 of your total owned share in every following month. You will only receive all the shares in the company after your stay in the company for a total of four years. It is a standardised contract of companies in Silicon Valley, the majority usage was to avoid co-founders dropping out of the company in the early stages and taking away a large number of shares. It would greatly damage the company.

Every founder needs to know about 83(b)

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Within 30 days after purchasing shares, every co-founder needs to print and sign a document called 83(b) and send it to IRS. This is the most troublesome process of all but it is a procedure that can not be escaped and you shouldn’t make any mistake on this. Every one of us signed two copies of 83(b) with a letter attached and put it in the same parcel. We send it to IRS by DHL and prepaid the mailing fee for IRS to send one of the 83(b) copies back to us as a record. I’d recommend you scan a copy of 83(b) before you send it out but remember to save the receipt when you send out the parcel. Everything listed above might be required whenever you are filing a tax report or going through a due diligence process during fundraising.

The purpose of sending the 83(b) to the IRS within 30 days is to declare your current valuation to IRS and prepay the tax for the shares you will purchase but have not yet obtained (almost the same as you don’t need to pay for the tax). If you didn’t send back the 83(b) within 30 days, you will need to pay tax based on the value of your shares within the next four years as they are vested. When your company’s valuation gets higher, you might be paying a crazy amount of tax. But your shares can’t be sold before acquisition or IPO, which means you won’t be able to afford the tax.

So I need to restate this again because this is really IMPORTANT: YOU NEED TO SEND 83(b) OUT WITHIN 30 DAYS AFTER YOU WIRE THE MONEY TO PURCHASE THE SHARES. DHL was quite expensive(it costs us a couple of thousand Taiwan Currency) but compared to the loss of not sending 83(b), these are nothing.

Translator: for more information about ‘What is a Section 83(b) Election and why you should file one’, check this.

Accounting and Bookkeeping

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After registering your company, getting EIN, opening a bank account, finishing stock purchase and sending out 83(b), the last thing you need to do is to find an accountant in the US to help you with accounting and tax filing. If you have investors, you can ask them to introduce you to someone they know. Our monthly bookkeeping costs $350 USD, and annual tax filing costs $2,000 USD so it is $6,200 USD in total for a year. These are the necessary expense if you are opening a company in the US.

Conclusion

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Above all are the details that Taiwanese start-up founders need to pay attention to. Hope this article can help the ones who want to build a global business.

Ending notes by translator:

This article is translated by Zhao. To see the original article written in traditional Chinese by Alan Chan, you can see it here. Zhao skipped the part he introduced about Y Combinator as most of the information is available on the internet. Alan and Zhao have both agreed that an English version would be beneficial to a broader range of audiences. Alan founded Heptabase, and his company was accepted to YC in the 2022 Winter Batch. Although his articles inspired Zhao in deciding what to do with Zhao’s start-up, his opinion doesn’t represent Zhao or the related company’s opinion. The translation was done objectively.

This blog will also publish other translated articles in the Start-Up Note Series written by Alan Chan.