I get this question with some frequency- how did you guys establish Slidebean in the US?
For 21-year old me, the prospect of owning a legal entity in another country might have
been as foreign as Klingon.
The truth is, sadly, information about all of this is scattered all over the web, and
you have no choice but to read—a lot. Or learn by messing up.
In case you didn't know- I'm Costa Rican. We started Slidebean in San José, but Slidebean
was established as a US company from the get-go. If you want to raise venture capital, or if
you want to sell internationally- a US company is probably the way to go in most parts of
the world.
So in this video, we will go over the good, the bad, and the ugly of running a US company-
and whether it's right for you.
Becoming familiar with a jurisdiction that is not your own will be a mess any way you
slice it. Running a company that operates across multiple countries will have extra
costs, any way you slice it.
So the first step is understanding if this is an actual need for your business. Do you
need a US entity? And when do you need it?
The first and most obvious reason is venture
capital. If you intend to raise venture capital, chances are your investors will require a
US entity.
But before checking that field, take a moment to analyze if you should try to raise money
from US investors: Remember, investors usually invest in their
backyards, so if you are based in Argentina with no plans to move anyone to the US anytime
soon, raising from US investors is a stretch. It's just too far.
US investors also invest in markets they understand. That means that if your product will not target
US customers anytime soon, raising capital there is not the first step for your business.
Another reason to establish a US entity is
access to platforms. For example, Stripe or Square are by far some of the best, most established,
most robust credit card processors out there- and they are not available in every country.
Even Brex or staff management platforms like Remote.com are designed for US companies and
often require a US entity to serve their customers.
In our case, Stripe was an absolute must. We needed a solid system to log customers
and subscriptions, and Stripe is a market standard.
It doesn't only translate to the tools they might give your team, but credibility for
the customers. Customers trust Stripe with their credit cards but might be more reluctant
to try another system.
Also, Stripe will bill the customer's card from the US: most credit cards will support
that without issue, but a sudden charge from a processor in Costa Rica is bound to raise
bank flags.
In our case, we ticked all these marks: targeting US customers, US investors, and with a need
for friendly international payments.
Contrary to popular belief, there are very
few requirements to establishing a US company. You don't need to be a US Citizen or Resident.
As a matter of fact, you don't even need to set foot in the US to do so- so you don't
need a Visa either.
I would advise against doing this if you can't even enter the country, but nothing stops
you from doing it.
Depending on the state where you are filing, you will need a local address in that state-
which will be your business' official address. So do you need a friend/address in Delaware
to catch your mail?
No. Of course. Someone already came up with a solution for that. A bunch of companies
offer that as a service. But I'll get to that in a sec.
The last requirement you have is deciding the type and location of the entity you want
to establish. If you are a startup, you want to go with a Delaware C-Corp, which is by
far the most standard, most well-known legal entity to VC investors. So much so that it's
often a dealbreaker if you are not (converting is a possibility, but it's expensive and takes
a lot of time, so get it right from the get-go).
Investors don't usually like LLCs or C-Corps outside of Delaware. I found a great article
about it. I'll link it below.
Now, there's an easy and a hard way to incorporate.
When we first started Slidebean, we knew almost nothing about incorporation, tax law, bank
accounts, etc. We had to rely on our friends, mentors, and support network via DreamIt and
500 Startups to help us figure all of that stuff out. But it's 2021, and there are better
ways to navigate this now.
Let's start with the steps, You'll need an agent to help you register.
There are a bunch of those available online, and they essentially file a paper with the
State of Delaware that says you are registered. But that's just the beginning.
Then, you need to solve your US mailing address, which you can hire from one of the services
I mentioned. Next, you need to apply for an EIN (Employer
Identification Number). This is the company Tax ID number, which you'll need to file taxes,
hire people, and sign up for a good amount of products.
Next, you'll need to prepare a few essential documents for the company. I'll list them
here:
Those documents lay out the company's rules and 'laws.' How much stock ownership does
each founder get, how many votes each share receives, and how and when shares of stock
transfer hands.
They define voting rules for the Board of Directors and what decisions can be made by
the CEO, the Board, or with the consent of the rest of the shareholders.
They also define vesting periods (critical to protecting the founders and the investors
if a founder decides to leave the company).
We have some templates available for a few of them.
Then, you need to step into the bank. Having a company is pointless if you don't have a
bank account. This is one of the most complicated steps because not all banks will let you open
a corporate account without stepping into a physical location.
So like I said, there are two ways to navigate this. The hard one is, you can Google different
services that take care of each part of the process.
The easy one comes thanks to our friends at Firstbase, a YC company quite literally dedicated
to helping foreign entrepreneurs succeed in The States.
The founder, Mark, created Firstbase.io with entrepreneurs like myself, Vini, Jose,
and you guys in mind. And we missed each other by a few years: they would have saved us a
lot of headaches (and a few thousand dollars) if they had existed back then.
These guys started by just helping you fill out your incorporation documents, getting
an EIN, and opening bank accounts- but today, they are more of an Operating System to help
you scale and grow your company faster.
All of that mess of steps and documents costs just $399 when using Firstbase, and if you
use the code in the description, you can get a 10% off, which leaves it at just $360 bucks,
and trust me, there is no better deal than that on the Internet.
So you're incorporated, you have stock certificates,
your bank account, and your EIN, and you're ready to go unicorn.
A couple of extra steps to take into account,
Trademarks: if you are looking to register a Trademark, now's the time to do it.
We've had some horror stories with Trademarks. For example, one of our law firms charged
us $2,000+ for filing a trademark that was not likely to get registered- and they probably
knew it before even starting the process.
So it's essential that you understand what can be trademarked and what is a long shot
and put your effort in the right places. That's a topic for a whole other video, probably
with a Trademark lawyer sitting next to me, so let me know if you'd like me to cover that.
If the name is new, or some unique spelling, or simply doesn't exist- you should give it
a shot. We have a few deals on our platform, and the guys from Firstbase do as well.
Last but not least, you can't forget about
ongoing costs because they can quickly add up. If you are bootstrapping and you incorporated
before you actually needed to, these can sting.
Some examples, State Fees: $500-$800+ per year
There's a minimum cost of operating any business. Delaware has a yearly tax of $400, and you'll
need to pay it every year regardless of your revenue/profit. Furthermore, you may need
to pay taxes for every state where you did any business (that is, where you had a physical
office or payroll employees).
So, for example, if you have a team that's separated in different states, you'll need
to file and pay state taxes for each state where your team operates. As you can imagine,
this can quickly increase your costs if you have a team all over the US.
Accounting and Tax Filing: $1000 - $5,000+ per year
Now, this is where shit gets scary. The fines for not filing your taxes correctly are HIGH,
usually starting at $10,000. Considering how empty our bank accounts were during the early
stages of Slidebean, a $10K fine would have killed us or cut our runway badly.
We've been using InDinero since the get-go and are overall happy with their service.
They do our monthly bookkeeping and tax filing at the end of the year (as long as you keep
your monthly subscription going).
If you want to save some cash, you can have someone on your team keep your books or hire
a cheaper bookkeeping service (web services ranging from $20 to $200/mo). You'll still
need to find someone to file your taxes at the end of the year, which could cost around
$750-$1000.
Startup Insurance: $1500 and up per year It's recommended that any corporation should
have an insurance policy. I wasn't familiar with this for the first couple of years, but
it's a critical element that investors often look for as part of their diligence process.
The most basic insurance policies you'll need are the General Liability, the Errors and
Omissions, and the Cyber Security plan. We use FounderShield for that.
Any foreign founders on the team with +25% ownership?
Bingo, you'll need to file form 5472. If you miss it? $10,000 fine!!
Tax teams usually charge an additional $400-$500 for filing this form for each foreign founder;
3 in our case. Yeah, ouch!
Does your US Company have a stake in any foreign company? Well, if that's the case, you'll
need to file Form 8865 every year. This is quite a long document estimated to take 50+
hours of a tax expert to complete, which means that the pricing will be steep.
Same as before, the fine here will set you back at least $10,000.
Closing the company: $1,000-$2,000 Last but not least, don't forget to plan for
the worst-case scenario. If your company fails, make sure that you still have enough money
in the bank to close your Corporation as soon as this happens. Otherwise, you'll be left
with an extra year of expenses and headaches related to your unused C-Corp.
As you can see, if you don't have at least $2K in the bank to pay for the tax filing
fees, you're going to end up with fines that could be trouble- so don't underestimate that
possibility.
I don't want to end the video on a down note. Our journey as entrepreneurs is full of risk;
that's just the truth. When you are bootstrapping, every dollar counts, so the best suggestion
I can give you is to be careful when you decide to move forward. If you are foreign to this
world and terminology, use a service that removes the headache: you want 100% of your
brain focused on building and selling rather than on logistics and paperwork.
We would not be here if we weren't a US entity- that's for sure. Sometimes, it's a leap
of faith.