Tuesday, December 11, 2012

US Incorporation and Flips FAQs

American FlagI am frequently speaking with foreign-based businesses about forming their company in the United States. They see the U.S. as a major market for their products or services and as a hub for investment capital, and they typically fall into one of two categories: (1) already seed-funded by angel or venture investors in their home countries or (2) no formal form of organization in their country, and interested in forming the entity directly in the United States.

Below are some of the most frequently asked questions in this context and my answers to them.

Do I Have to be a US Citizen or Resident to Form a Company in the US?

There are no nationality or residency requirements in the United States for either the members of the board of directors of a company or for its shareholders. This is a major advantage to incorporating in the United States, as it avoids the hassle of having to engage resident nominee directors as may be required in certain other jurisdictions.

However, the issue of ownership, or control, of a US corporation is not to be confused with the question of who can be employed by such a corporation in the United States. All employees a US corporation who will be employed in the United States must be work-authorized - in other words, they must be citizens, permanent residents, or have a visa which permits their employment by any employer or this employer in particular. Offshore employees may be employed directly by the US corporation or by a foreign-based subsidiary of such corporation, the latter being more typical.

How Quickly Can I Form a Company in the US?

If you are ready to go--in other words, if you have filled out our formation questionnaire, signed our engagement letter, and sent in a retainer--and assuming that we are forming a Delaware corporation, we can usually get a company formed for you within 24 hours. After the certificate of incorporation is filed in Delaware, it will take another one to two weeks, depending on whether there is urgency, to prepare the other documentation necessary to set up the company for operations.

On our end, this includes preparation of the following, as necessary and applicable:

  • a capitalization table;
  • bylaws;
  • action by incorporator (appointing directors);
  • organizational board consent (authorizing initial stock issuances, among other things);
  • stock purchase agreements for founders and early employees;
  • assignment of intellectual property to the newly formed company by the founders;
  • documentation of investments into the company which precede or are contemporaneous with formation;
  • indemnification agreements for officers and directors;
  • application for employer identification number (necessary to open a US bank account);
  • state qualification to do business; and
  • form of confidential information and inventions assignment agreement.

Will You Help Us Open a Bank Account?

We work with several startup-friendly local banks, and will be happy to assist with opening your business checking account. Note, however, that to open a bank account, someone from your company will need to come here to meet with a bank representative in person, and while we can assist, we cannot open the account on your behalf.

What's the Minimum Capitalization Amount for a US Corporation to Meet the Statutory Requirements?

There is no statutory minimum for investment into or capitalization of the newly formed company. However, you should plan to provide sufficient capital for startup expenses, taxes, etc. to maintain the company in good standing under federal and state laws. Note also that your bank may impose a minimum monthly balance that it requires you to keep in the account to waive fees.

What Are the Annual Corporate Maintenance Obligations Associated with a US Corporation?

If a company has no physical presence in the United States, the following are the annual maintenance obligations of which it needs to be aware:

  • Registered Agent. A US corporation must have a registered agent for service of process in the state of its incorporation. This is an annual subscription service, which receives "official" mail on behalf of the corporation and forwards it to its real address (in another US state or abroad, as specified).
  • Franchise Tax. Delaware and most of the other states have an annual franchise tax requirement.
  • Information Statement. Delaware and most of the other states have an annual information statement requirement. In some states this is combined with the franchise tax payment and in others it is separate.
  • Tax Return. As a separate legal entity for IRS purposes, a US corporation must file federal and state tax returns. For this, it is advisable to retain a CPA or a tax accountant, who can streamline the process.
  • Annual Meeting of the Board of Directors. To maintain the limited liability protection offered by the corporate form, it is advisable for a corporation to hold a meeting of the board of directors at least once annually (though for an operating company the practice is quarterly meetings). These meetings should be documented with board meetings prepared either by the company's secretary or your attorneys.
  • Survey of Foreign Investment. Bureau of Economic Analysis requires all U.S. businesses that are owned 10% or more by foreign persons (individuals or corporations) to file a Survey of Foreign Direct Investment in the United States

This list is not exhaustive. And there may be other maintenance obligations with respect to a company in a special regulated industry.

What is the Difference between a Flip and a New Company Formation in the US?

If you look back to the first paragraph of this post, companies in category (1) that are looking to create a US parent company to their preexisting foreign-formed company need to "flip" their foreign company to the United States. Conversely, companies in category (2) of that paragraph will typically need a simple US company formation. Flips, as you can imagine, are more complex animals, as they involve structuring inter-company relationships that affect revenue flow, IP creation and ownership, and customer relationships in addition to simple US company formation. Generally, we see flips arise in the context of a significant financing round from a US venture fund that requires the company to be a US corporation. (More information on flips.)

Happy company making!


White Summers  Inna Efimchik at White Summers Caffee & James LLP, specializes in assisting emerging technology companies in Silicon Valley and beyond, providing incorporation, financing, and licensing services as well as general corporate counseling.

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