Should I set up my startup in the US?
Expanding into a new market is an incredible achievement for any startup. However, it does raise new questions and challenges. If you’re thinking about registering your startup in the US, take a look at these early legal considerations.
Is it the right move?
With the world’s largest economy and a population of almost 330 million people, the US market offers incredible opportunities for startups. If you are seeking venture capital or considering going public, US investors prefer US corporations, in particular Delaware corporations. Incorporating in the States makes it easier to open a US bank account and request loans in the US. American clients are also more willing to deal with a US company for various reasons including the time difference and dispute resolution location.
However, registering your company in the US is expensive and brings with it serious tax implications. Make sure you have completed a cost/benefit analysis based on your business’ aims and its current level of development. For some startups, other jurisdictions, such as Singapore, may be more viable or attractive at an earlier stage.
When you register in the US, you need to decide on the type of business entity which best suits your startup. This carries similar liability and tax implications as your Australian business structure choice (i.e. sole trader, partnership, corporation).
- Foreign branch: Opening a foreign branch in the US allows you to conduct business in the US without creating a new company. However, a foreign branch is not the same as a subsidiary. A foreign branch is not a separate legal entity, it is one and the same with the Australian company. This is an easier option than creating a separate company but it opens up the Australian company to the liabilities of the US foreign branch, which is a significant disadvantage.
- C-Corporation: There are different types of corporations in the US. The most common type of corporation is a C-Corporation (C-Corp). A C-Corp, like an Australian company, is a separate legal entity. This allows the company to enter into agreements, and pursue legal action. It also provides owners with limited liability protection. C-Corps are taxed at the company level and the shareholders are also taxed. An S-Corporation allows shareholders to avoid the double taxation of a C-Corp, but they cannot be owned by foreigners. Investors tend to prefer corporations over LLCs, so this is likely the best option for a startup seeking venture capital.
- Limited Liability Company (LLC): LCCs are owned by members and can have a single or multiple member structure. An LLC also has a separate legal identity, allowing the company to enter into agreements and protecting the members from personal liability. Members can elect for the LLC to be taxed or to be taxed at the member level, avoiding the double taxation of a C-Corp.
Unlike Australia, businesses incorporate at a state level in the US. Each state has its own rules and regulations, so choosing the state you want to incorporate in is a big decision. Along with considering the market, you’ll want to consider the legal ramifications of different states, including:
- Corporations law
- Employment law
- Tax law
Traditionally, startups have been attracted to Calfornia, with Silicon Valley’s reputation for startup success becoming the stuff of legend. Delaware is also popular for being a relatively easy state to incorporate in for non-US residents and having expansive legislation governing C-Corps which investors view favourably. However, other states are disrupting that status quo, including Texas and Florida, for different reasons such as low taxes or strong venture-capital scenes.
Similarly to your IP registration in Australia, you will need to ensure your intellectual property is protected in the US. The importance of protecting your IP in various overseas jurisdictions is vital to the health of your business and its ability to grow internationally. Your Australian IP registration only protects you in Australia.
You will need to register your patents, trademarks and other forms of IP either directly in the US or via some of Australia’s international agreements. For example, you could file an international application through the World Intellectual Property Organisation for trademark protection. The US intellectual property system is governed at the federal level. The costs, time and importance of IP protection outside of Australia should not be underestimated.
Taking the leap and entering the US market is an incredibly exciting achievement! The decisions you make early on – such as jurisdiction and business structure – will have a large impact on your development in the US market. Most importantly, if expanding into overseas jurisdictions is a goal for your startup, make sure you have protected your intellectual property to safeguard the future growth of your business.
If you need advice about setting up in the US or another country, get in touch with our startup team via the contact form or by calling 1300 337 997.