Over the years, India has managed to become home to some of the most successful businesses around. E-commerce businesses like Flipkart managed to pioneer the way for many startups. Places like Mumbai and Delhi have begun to rival places like Silicon Valley and Singapore as the Indian startup scene explodes. The government of India has done everything its best to ensure that more small businesses are founded and that the startup ecosystem is favorable for future founders.
However, most people are interested in setting up a business in other countries. The world has become closer thanks to the advances in technology. People from India can comfortably establish startups in early-stage from other parts of the world and sell their products to people on the other side of the globe. Some of these places have more lenient policies to establish a business compared to others.
One of the most popular destinations for people to set up a business is in the USA. Setting one up in the US builds more trust in international customers, and the facilitation of payment is far smoother. It’s one of the many reasons why founders are looking forward to setting up a business in the US. Of course, like any other area in the world, there are several policies and protocols you need to adhere to.
Chances are, you already have an Indian entity but are looking to establish a US entity. If you are wondering if that’s even possible, the answer to that question would be yes. Even if you are a non-resident of the US, it’s possible to start a company in the US.
Here is the best way for a startup in India to structure a separate legal entity.
How can an Indian startup set up a US Entity
If you are a startup in India interested in setting up an entity in the US, there are several things you need to consider before setting up a US entity. First off, you need to decide on which type of entity you want to form for your business. You need to decide on which type of entity is the most suitable for you.
There are two popular types of entities that foreigners usually prefer to form in the US:
- Limited Liability Corporation (LLC)
Indian startups should have experience dealing with something similar when they establish their startups in India. Limited Liability Partnership (LLP), Private Limited Company, partnership firm, one person company, and partnership act are just some of the things an Indian startup deals with when choosing a business model.
Let’s take a close look at these two options.
Limited Liability Corporation (LLC)
A Limited Liability Corporation (LLC) is a popular business structure due to the flexibility it offers. It provides you with limited liability, tax benefits, and legal protection for your personal assets. The LLC also has the option to choose whether it is taxed as an individual or a corporation. Another name this entity goes by is the Pass-through entity.
If you decide to be taxed as an individual, you can avoid double taxation. That means the income of the business is taxed as the income of the members-only, and the company does not pay any tax on it as a separate entity.
On the other hand, corporation income is taxed twice. The first tax comes from the hands of the company, while the second tax is from the individual.
The liability of the members of this entity is limited. It’s one of the primary reasons why venture capitalists are hesitant to invest in an LLC. Furthermore, venture capitalists prefer to take preferred stock, which ensures a steady income and ownership rights, which are only available for companies that choose to structure themselves under a C-corporation.
For that reason, if you are planning to get direct investment from venture capital or incubator for your startup, then it may not be the ideal choice for you.
A C-corporation, otherwise known as the closed corporation, is one of the most common business structures in the US. For this business structure, the liability of the members is limited.
Using this structure allows you to issue out stocks and thus has very massive potential for growth. There are also no restrictions on the maximum number of shareholders. The compliance procedures of a C-corporation are far more extended compared to LLC. You must maintain a book of accounts and comply with any other rules and regulations.
Unlike the LLC, C-corporations do not have the choice on how it is taxed. It will be taxed solely as a corporation. That means any company that has structured its business as a C-corporation is subjected to double taxation wherein the corporation is first taxed as a separate entity, and then the dividend is taxed from the individual as well.
If you are interested in raising funding in the future, C-corporation is the best choice for you since venture capitalists are known to favor C-corp over LLC. C-corporations are only permitted to issue preferred stock which is usually a sought-after investment for VCs. It ensures they receive a steady and higher income through dividends.
Additionally, if there is ever a case of dissolution, preferred stockholders are paid before common stockholders, which is an additional advantage. It should be noted that C-corporations don’t have a limit on the maximum number of shareholders. Hence, in case your company needs extra funding, more shareholders can be welcomed.
The decision on forming an entity all comes down to the long-term vision of your startup company. C-corporation is an excellent choice for founders who plan to raise capital and expand their business over time.
Should the entity in the US be a C-Corp or LLC?
That depends on what you are trying to achieve with your business. Here are several things you should consider when you are deciding on either of these two business entities.
- How are you going to secure personal assets from liabilities of the business?
- Tax strategies such as taking full advantage of the income tax benefits of startup losses
- Choosing an entity that can attract potential investors and lenders
- Costs for startup and other ongoing business needs
- Avoiding double taxation and investment income for long-term capital gain that is taxed at lower rates
- Potentially offering equity incentives to employees and other service providers
Here’s what you are getting if you decide on a C-Corp:
- Want to ensure your business remains a separate tax-paying entity
- Are interested in raising funds from investors, such as venture capitalists
- Want to grant equity to employees, investors, and advisors
- Wish to regulate governance structure
If you are unsure of which to choose, you could always start by setting up an LLC and then transition into a C-corp when needed. When it comes to income tax, the difference between the two lies in who is registered as the taxpayer. You should also be aware that the founder is registered as the taxpayer, and the profit earned are included in the personal taxes.
C-corporation is registered as a separate tax-paying entity. The profits and losses are accounted for by the corporation, not the founder.
US states for Indian Startups?
When you have decided on which entity you want to form, the next step is to decide on the place where you want to establish your startup. All of the states in the US have their own set of laws and regulations for registering a business. You do have the option to register anywhere, but some places are better than others.
For example, the state of Delaware is considered to be one of the most foreign-friendly areas. The laws are pretty relaxing for non-residents who wish to thwart their business in the US. There are other places, like Texas, where India’s popular company Zomato US headquarter is based, but Delaware is best for Indian startups.
How to incorporate an LLC in Delaware?
The first thing you need to do is choose a name for your company. You need to come up with a suitable name for your company and then check to see if it’s available. If it has been taken, then choose another one that is distinct and suitable for your business.
When you finally nailed a name down, you need to immediately reserve the name for a fee of $75. You’ll have to exchange Indian rupees (INR) to Us dollars to pay the fee. Here is the site you can check to see if a name is available, and you can register the name here.
Appoint a registered agent
Once you have a name for your LLC, the next step is to appoint a registered agent. A registered agent is a person or business entity who has the authorization to collect legal papers on your behalf. The registered agent you choose needs to have a physical address in Delaware. You can be your own registered agent if you are physically present in Delaware. Here is a list of registered agents to choose from.
File a certificate of formation
With a registered agent under your wing, the next thing you need to do is fill the form for Certificate of Formation of Limited Liability. The form demands you to provide the LLCs name and the information of the appointed registered agent. Keep in mind that you do not need to have a physical address in the US to register in Delaware. That includes the registered agent-based in Delaware is enough.
The filing fee is $90, and the process takes around 7-14 days. To pay the fee, you’ll have to convert Lakh and Crore into USD.
The operating agreement is a legal document that defines the relationship between the co-founders and sets up the financial structure of your startup. While this is not mandatory, it is advised to make one.
In the absence of an operating agreement, the state’s default operating rules are applied. That is why you should consider making an operating agreement, so if a dispute does arise, the courts will honor your deal over the state rules.
EIN- Employee Identification Number
If you have more than a single member in the LLC, you need to apply for an EIN, even if there are no employees. If you are the sole member, you can opt to tax your LLC as a sole proprietorship. That is only an application if you won’t be employing any employees.
Pay mandatory State Tax
The state of Delaware demands you pay an annual tax of $300. The payment needs to be done before June 1st of every year and is paid to the Delaware Division of Corporation Franchise Tax section.
How to incorporate a C-Corporation in Delaware?
The steps to incorporate a C-corporation In Delaware are somewhat similar to the LLC, with the first thing you need to do is choose a name for your company. Once you’ve done that, you need to pay a fee of $75 to reserve the name.
Now you need to appoint a registered agent to handle all of the legal paperwork on your behalf.
File the certificate of Incorporation
This is a crucial step where you need to file the certificate of incorporation with the state.
Here is the following information you need to fill in to file the incorporation form:
- Company name and address
- Purpose of formation of the business
- Name and address of the registered agent
- Name and address of the promoters
- Mention authorized capital
You need to take note that the address of the registered agent is different from your business address. This is why you need a physical address in the US to register as your address.
Fortunately, there are ways to get around this if you are based in India and have no physical address in the US. Virtual offices are a concept in the US that provide you with an address where you can receive all mail, and they also offer you a local US phone number.
Here are some virtual offices you can choose from:
- Virtual Post Mail
- Opus Virtual Offices
- DaVinci Virtual Offices
The filing fee is $80, and you can either file it by mail or fax. There is no way to do this online, which is why you should ask your registered agent to file it in your place.
Employer Identification number
You still need to apply for EIN for tax compliances reason. The whole process is free and can be done online. Once you’ve done that, you will have an established corporation in Delaware and can start your business as a US corporation.
Another thing you need to do is file annual reports of the company every year by March 1st. The fee for filing the returns costs $50. The penalty for not filing your returns is $100.
Setting up an LLC and C-corporation can be challenging. If you need help setting them up, check out Startpack. Our services will help you set up an entity in the US in no time.
US Bank Account
You must acquire a business checking account with a US bank. If you already have a personal bank account with a US Bank, you can try getting in contact with them to open a business checking account. If you don’t have a US bank account, you may open one if you are ever physically in the US. All you need to do is walk into the bank with the incorporation documents of your company and open the account. Or, if you have a US-based partner or someone there, they could act as the signer on the account. It should be noted that you’ll need these if you wish to convert them into crore or lakh with the RBI.
Another issue you need to deal with is arranging a payment process facility for your business. Various options allow your clients to pay you for your service or products that don’t involve credit cards. Here are some of those solutions:
- ACH payment services
- Checks (it has the option to be deposited online)
- Money order cash
- Paypal and other alternative solutions
- Western Union and similar services
- Virtual currencies
- Wire transfers
Depending on the things you are selling, you may need to explore your options while looking for a credit card processing solution. Nevertheless, credit and debit cards processing systems are required for the overall growth of your US business. Let’s go over how the credit card process works.
A payment gateway is known as an e-commerce service that authorizes payments for online retailers and e-businesses. Payment gateway is offered by payment processors such as PayPal or Authorize.net. Creating an account with one of these payment processes is easy to go through. The real challenge comes from opening a merchant account.
A merchant account is a bank account that enables businesses to accept payments from payment cards, such as debit or credit cards. These accounts are provided by merchant account providers. The funds are processed through a payment gateway and then deposited into the merchant account. It then gets deposited into the company checking account.
The difficulty of opening a merchant account comes from the fact that merchant account providers are exposing themselves to potential financial risk from their customer’s business activity. The risks are mitigated by banning certain countries and specific types of businesses designated as high-risk businesses.
US companies owned by Indian founders who don’t have a Social Security number or any merchant history in the US can fall under the high-risk category. Some merchant account providers serve high-risk businesses, and they are known as high-risk merchant account providers.
That’s all you need to know if you wish to start a business in the US. If you are looking for help to establish your business in the US, check out our services.