Entrepreneurship

Guide to incorporate a startup in the US

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Guide to incorporate a startup in the US

So if launching a startup in the US can be overwhelming and time-consuming, why do so? Most startups and tech companies incorporate in the United States because it gives them access to payment gateways for international customers. Although incorporating a business can be complicated for those unaware of US regulations, many resources and startup incorporation services can make the process easier.

Whether the entrepreneur is a US citizen or a foreigner, there are things to know and steps to follow to ensure the successful incorporation of their business, and in this guide, we will cover them all.

What is incorporating a startup?

Incorporation is the legal process any startup must follow to become a business and separate from the owner's assets in almost any country in the world, including the US.

What are the advantages of incorporating a startup in the US?

incorporating a startup in the US

Some of the main advantages of incorporating a startup in the USA are:

  • Protects the owner's assets
  • Allows for easy transfer of ownership
  • Business bank account
  • Offers a lower taxation rate
  • Provides lenient tax restrictions and the ability to carry losses
  • Allows for the sale of stock to raise capital

The benefits of incorporating a business are such that just in November 2022, over 47,000 applications from corporations were submitted (US Census Bureau).

Startup founders need to keep in mind that depending on the location and business structure, some of these benefits may vary.

Incorporating a startup in the US is possible for foreigners?

The answer is yes. There are no restrictions on foreign ownership of a company in the US, and the country welcomes investors and entrepreneurs.

Nevertheless, the requirements and conditions to launch a startup can be confusing and time-consuming, even for US citizens. That is why getting help and advice from a registered agent is crucial to new entrepreneurs who want to ensure their business operations are correctly set up.

What are the steps to incorporating a startup in the US?

For those entrepreneurs thinking of bringing their vision to life and launching a startup in the US, they are a few steps every new business can follow to ensure a smooth and successful process.

  • Decide on the location.
  • Choose a Business Structure
  • Pick a company name
  • Obtain a Tax ID Number
  • Submit Company Documents

Step 1. Decide on the location

brown and blue round fruits on water

Deciding which state to incorporate and operate a business is essential to any startup, as it will affect other decisions during this journey and in the future.

In the United States, each state has different jurisdictions and rules that affect the creation of any institution. Depending on the state, entrepreneurs may have different tax rates and guidelines to follow.

For this reason, entrepreneurs tend to look for the best state to undergo operations based on the tax rate, the overall cost of living, the weather, and more. To keep the launching costs to a minimum, startups incorporate their business in the same place they operate. Companies that want to run in other states must receive approval from each state.

But how do companies choose where to incorporating a startup in the US?

Before choosing where to settle, brands tend to consider things like:

  • Government incentives
  • Taxes
  • Who are the target customers
  • Workforce
  • Weather
  • Vendors and suppliers
  • Business expenses in the region
  • Cost of living

What is the best location for a business in 2023?

According to Forbes Advisor, the best five states for business in the US  in 2023 are:

  1. Indiana: This state has an income tax of 3.23% (flat) and a corporate tax of 25%
  2. Colorado: In this state, the income tax is 4.55%, and their corporate tax is 24% a
  3. North Dakota: The income tax is 2.90%, while their corporate tax is 24%
  4. Pennsylvania: Also known as the Keystone State, the income tax rate is 3.07%, and the corporate tax rate is 29%.
  5. South Dakota: Undoubtedly, the lowest income tax rate, at 0%, and a corporate tax rate of 21%.

What are the best locations to incorporating a startup in the US in 2023?

The best locations are Wyoming and Delaware.

Wyoming: known as a tax haven, is one of the most favorable US states for startup companies. This state has no income or corporate tax and only has a local and sales tax rate of 5.22%.

This state is also an excellent choice for startups because there are tax breaks, minimal corporate paperwork, and low operating and energy costs compared to other US states.

Moreover, they have the Wyoming Center for Entrepreneurship and Innovation (WyCEI) at the University of Wyoming to help entrepreneurs get their businesses off the ground.

The fill-in cost to launch a startup in Wyoming is $100 plus another $100 for the Articles Organization. Another extra cost to consider is for a registered agent or incorporation services, as it is mandatory to have one to help with the process.

To learn more about the required documentation, founders can consult the Wyoming Business Center website.

Delaware:  In this state, companies can enjoy favorable laws tax unavailable in other locations. The only tax required to pay is the franchise tax.

Generally, corporate disputes can take a long before they get to a solution in other states, but in Delaware, there is a "Court of Chancery," meaning that judges can fix any dispute quickly.

Another benefit is that startups can access various state incentives, from financing to research and development. And unlike most states, Delaware does not levy state taxes for inventory, unitary, use, inheritance, capital share, stock transfer, or value-added taxes (VATs).

As a plus, Delaware requires little information, so registering a company is faster.

In Delaware, the filing fee is $90. For foreigners, the process involves filling out a Certificate of Registration and paying $200. After that, new businesses must apply for a business license for $75 and additional fees if the state requires it.

What are the worst states for incorporating a startup in the US?

The Tax Foundation says that the five lowest-ranked states are Maryland, Connecticut, California, New York, and New Jersey.

Due to the high unemployment rate, relatively low survival rate, and cost of living, New York is considered as the worst state to incorporate a startup in the US in 2023.

Step 2. Choose a business structure

incorporating a startup in the US

Picking a business entity is the next stage of the process and, under any circumstances, should be taken lightly since the business structure will condition the legal liability, the amount of taxes a company pays, the day- to day operations, the paperwork, and so much more.

To make the right decision, entrepreneurs must consider the following:

Size: Different entity formats suit better specific institutions and their needs. Organizations must consider how small or big the company will be to find the right one. They should also think if there is only one or many owners.

Liability protection: When choosing a business structure, entrepreneurs must consider liability. Some business structures offer liability protection, meaning that the business partner's assets are protected in case of a legal claim, bankruptcy, or any other event that may harm the company's finances. If the risks of loss are significant, startups should consider an entity with liability protection.

Taxes: Some business structures allow entrepreneurs to categorize their business income as personal income and pay taxes under that category. Whereas in other formats, businesses and owners must pay taxes. It is possible to minimize taxes in both structures with the help of a good registered agent.

Admin: Every business format has different paperwork to fill. The more basic the business structure, the less paperwork and the easier it is to gather all the information and requirements. A startup with a tied budget must pursue a simpler structure to save money.

Fundraising: Another factor to consider is fundraising. Not every entity format has the possibility to ask for investors or raise funds.

Future needs: Choosing the most basic structure just because it is seemingly more straightforward is not always the best route. Although changing the format is always possible, it is usually a complicated and tumultuous transition.

Once aware of these points, entrepreneurs can select among 4 main different business structures, but what are the 4 types of corporations?

  • Sole proprietorship
  • Partnership
  • LLC
  • Corporations

Solo proprietorship

The USA Internal Revenue Service, or IRS, says that a sole proprietor is someone who owns an unincorporated business by himself or herself. With that in mind, a solo proprietorship is a business structure with a single owner.

This kind of entity is the simplest and gives complete control to the owner. However,  the owner is personally accountable for all of the company's financial obligations.

Solo proprietorships are pass-through-tax entities, which means their taxable income "passes through" to the owners' personal tax returns and is taxed there.

Perfect to: Due to the financial obligations, this type of structure is better for small and low-risk/low-profit brands or people who want to monetize their hobbies like blogging, photography, or video streaming

Best US states for Solo proprietorship: Some of the locations for best Solo proprietorships, reportedly by the Tax Foundation, are Wyoming, South Dakota, Alaska, Florida, and Montana.

Pros

  • There are no formal requirements or fees to get started.
  • Low cost of the entire process
  • Maximum privacy
  • Easy to change your legal structure if needed
  • Autonomy in making decisions

Cons

  • No Liability Protection
  • No tax benefits
  • Less Credibility
  • Limited

Partnership

As its name suggests, a partnership is a privately held company run by two or more partners.

In this type of entity, each partner contributes with resources, skills, and property and shares the expenses, profits, and losses.

Partnerships have pass-through taxation, meaning that taxes won't be paid by the business but by the owners or customers.

There are two common types of partnerships: limited partnerships (LP) and limited liability partnerships (LLP).

The main difference between LP and LLP is that in Limited Partnerships, there is a single general partner with unlimited liability. On the other hand, in limited liability partnerships (LLP), all the partners have limited control over the company, plus partners are not responsible for the actions of other partners.

Perfect for: A partnership is suitable for a new small to medium-sized multi-owner company.

Best US states for a Partnership: The best locations are Wyoming, South Dakota, Alaska, Florida, and Montana.

Pros

  • Support system
  • Less Financial Burden
  • No additional business entity taxes

Cons

  • All decisions are by consensus
  • Split profits
  • Taxed individually
  • Potential disagreements

Limited liability company (LLC.)

Entrepreneurs see Limited Liability Companies as a convenient alternative since it has liability protection like a corporation and pass-through taxation like a partnership.

This means that business owners paid taxes as self-employed under this regime, but their assets are protected in the case of bankruptcy or other events. For this reason, many think that LLC is the best company structure for startups.

Before registering their organizations under Limited Liability Companies, business owners must check the specifications of the US state. In some places, they request the company to dissolve in case one of the owners leaves.

Perfect for: This structure is better for medium- to high-risk businesses looking to protect their assets and pay a lower tax rate.

Best US states for LLC: Some of the best places to establish an LLC are Delaware, Wyoming, Nevada, and New Mexico (Forbes Advisor). These places are best for LLCs because of the law, low fees and taxes, privacy, and no annual reporting.

Pros

  • Pass-through taxation
  • Fewer regulations than a corporation
  • Ownership Flexibility
  • Some liability protection
  • Less paperwork than a corporation

Cons

  • It can't issue shares
  • Harder to get investors
  • Additional fees in some states
  • Under certain circumstances, some states can request to dissolve the LLC in certain circumstances.

Corporations

Regardless of whether they are looking to create a nonprofit organization or a business, this type of entity is perfect for those who want a flexible structure or plan to expand their organization in the future. But in what ways do corporations grow?

Corporations can grow by expanding into different markets, offering or incorporating new products, or simply franchising.

There are different formats for launching a company, but two that stand out. So what are the 2 types of corporations?

S Corporations (S Corp)

Similar to partnerships and proprietorships, S corporations are pass-through entities.

According to US Small Business Administration (SBA), S corporations are designed to avoid the double taxation drawback of regular corporations.

With this type of corporation, entrepreneurs can have certain profits or losses passed directly to the owners' personal income without being subject to corporate income tax.

The main difference between an S Corp and a partnership is that in an S corporation, owners have to pay themselves a reasonable wage subject to FICA tax. In contrast, a partnership does not allow payroll payments to the owners, which reduces the costs and process of payroll management and payroll tax reporting.

To get S corporation status,  companies must apply with the IRS, which is a separate process from registering with the state. To become an S corp, institutions need to meet certain requirements requirements.

Perfect for: S corps are better for US residents or citizens. Foreign investors cannot launch a startup under this entity. It is also a good fit for a smaller business that won't need a lot of shareholders in the long run.

Best US states for an S corp: Some of them are South Dakota, Wyoming, and Delaware.

Pros

  • Pass-through- tax
  • Corporate legal protection
  • Wages not fixed to FICA tax

Cons

  • Not for foreign investors
  • No more than 100 shareholders
  • A lot of requirements
  • Same amount of paperwork as a C corp

C corporation (C-corp)

Along with LLCs, C corporations are arguably the most popular business structures for launching startups.

This structure protects the partner's assets in the event of a loss or a debt payment to be made, as the business is a separate entity from the owners.

Another reason why many startups prefer this structure is that, unlike LLCs, C corporations can raise money and sell stock. In addition, C corps can remain in business indefinitely even if one of the shareholders leaves the company.

On the downside, forming a C corp is more complicated and expensive than any other business structure, and once the organization starts to run, both the company and the owner have to pay taxes, known as double taxation.

Perfect for: Mid to high-profile companies that want to raise money as it is attractive to investors. According to Silicon Valley Bank, SVB is the right choice for tech startups and other types of startups, specifically intellectual property businesses.

Best states for C corps: Are Delaware, Wyoming, and South Dakota. Each state has a different advantage; for example, in Delaware, entrepreneurs can avoid double taxation thanks to the state's regulations.

Pros

  • Better for Fundraising
  • Liability protection
  • Issue Stock
  • Credibility
  • Unlimited stockholders

Cons

  • Legal assistance is needed.
  • Double taxation
  • A lot of documentation
  • Higher fees.

Step 3. Choose a company name

As mentioned before, every state has its laws and requirements, but it is necessary for all states that the company name is not registered or used by another business. If their new company is a subsidiary, they can add 'USA' to their current name.

There are four steps to follow when registering a name in the US. The first step occurs automatically after a company registers as an entity. Next is registering a trademark to ensure that no one in the same or similar industry can use that name. After this, the partners must register the DBA, the informal name the company will use to do business. The final step is obtaining a domain name so that the company can have an online presence.

There are some tips founders can follow to find the perfect name:

  • Easy to pronounce: The company name should be easy to pronounce in different languages, particularly in English.
  • Unique: A unique name will make the company memorable.
  • Not very descriptive: A descriptive name can cause problems in the future if the brand wants to expand.
  • No trends: Language trends come and go, and new generations may not understand references, so it is better when the name is timeless.

Step 4. Obtain a Tax ID number

The next step of incorporating a startup in the US is obtaining a Tax  Number.

Although technically, only some entities need a Tax ID Number in the US, it is almost impossible to do some procedures without one.

A Tax ID Number, also known as an employer identification number (EIN), is mandatory for some industries and is required if the startup wants to file taxes separately or hire employees. In this regard, it is recommended that all companies have a Tax ID Number,  but how do get a Tax ID Number?

The process for getting an EIN is similar for US citizens and foreign partners. Once the owners have registered their business with the state, they can go to the Internal Revenue Service (IRS) website and get the application.

The IRS will ask for some information such as the name of the startup and owners, address, type of business entity, industry, where it is registered, etc. Once the application is completed and all the information is gathered, partners can submit it.

Getting the EIN is free and only takes a few minutes.

Entrepreneurs should keep in mind that the US is a country where anyone with a business must pay certain taxes, regardless of size, amount of profits, etc.

What are the taxes a startup must pay in the US?

  • Income tax
  • Federal Income tax
  • State income tax
  • Franchise tax
  • Extra taxes (depend on the location)
For more comprehensive resources on taxes and filing deadlines, visit the Bench's website.

Step 5. Submit any other company documents

Incorporating requires every US-registered company to submit the correct documentation subject to the state. The startup formation is complex and more for those unfamiliar with the laws in the USA.

Incorporating a startup in the USA: Choose an advisor

It can be overwhelming and time-consuming to incorporate in the U.S. Hiring the services of a third party can help navigate the legal and tax requirements.

An online incorporation service is the easiest way for a non-U.S. startup to incorporate in the US They offer a comprehensive solution for setting up and maintaining a business legal entity through a virtual office.

Incorporation services will do the hard work, from lodging the proper forms to setting up a US bank account. Below is a list of recommended incorporation services, the cost involved, and their offer.

  1. Firstbase.io - The best choice for startups
  2. Stripe Atlas - Good for post-incorporation processes
  3. Incfile- Most Features
  4. Doola - Good for businesses who need a fast-tracked service
  5. Clerky - Easy to use automated setup
  6. Zenbussines- Competitive price
  7. Capbase - Helps manage legal requirements.
  8. LegalZoom- Widest array of legal services

Firstbase.io

Is one of the top-performing incorporation services for entrepreneurs incorporating a startup in the US. The all-in-one platform takes 5 minutes to fill and gives startups access to expert tax and legal consultants and lifetime support. Cost: $399 one-time fee.

Stripe Atlas

Used to help businesses lodge C corporation status in Delaware. Stripe Atlas assists companies in setting up a US bank account but does not offer the same service as other online incorporation providers. Cost: $500

Doola (formerly StartPack)

Can set up a C corporation or LLC in any US state. Services include a fast-tracking fee, setting up a US bank account, state compliance, and taxation filings. Cost: $199/month

inclife

This incorporation service has no annual or hidden membership fees. They provide many features to help entrepreneurs launch their startups with no setbacks. inclife has 3 different packages for every business structure and state. The plans are Silver, Gold, and Platinum and vary by state. For example, their Platinum plan for Delaware is a one-time payment of $418, while the same plan for Texas is a one-time payment of $599.

ZenBusiness

Undoubtedly, because it is one of the most competitively priced in the market, it is one of the favorite services to help launch startups. Entrepreneurs can choose from three plans: Starter for $0, Pro for $199 billed annually, and Premium for $299 per year. Plans do not include state filing fees.

Clerky

Offers quick and easy setup through an automated process that requests information and submits it to a third party in Delaware. Services include incorporation paperwork, annual reports, and taxation reminders. Cost includes a fast-tracking service that can have a business incorporated in 2-3 days. Cost: $799 one-time fee

Capbase

Lodges forms for a C corporation in Delaware can set up a board of directors and register a business in any state. Services include legal requirements, compliance, and corporate governance. Cost: $999 per year.

LegalZoom

It is one of the most popular service providers in the market. With the widest range of legal services, LegalZoom offers a 100% money-back satisfaction guarantee. On the other hand, they do not provide free registered agent service and charge between $249 and $299 annually. Startups can choose different services, and their plans range from $99 to $400.

How to protect the business and personal assets during the incorporation process?

Incorporating a startup in the US is costly - there are many expenses to cover, from stuffing costs to lawyers. But even though setting up a company requires an investment and taking certain financial risks, entrepreneurs can still take steps to protect their personal assets during the registration process.

The best practices to protect assets during the incorporation process and when afterwords are:

Incorporate the business. For companies in a sole proprietorship or partnership, it is convenient to consider changing their corporate structure to one that offers liability protection.

Being under an S corp or C corp allows entrepreneurs to create a separate legal entity and thus protect their personal assets.

Business and personal insurance: No matter how small or large the business investment is, the reality is that no businessman wants to jeopardize their personal assets at risk.

Insurance offers options such as professional liability to protect startup assets, which covers the business against negligence claims and other eventualities. Insurance can also cover potential lawsuits, pay for loss of income, natural catastrophes, and more.

Avoid Personal guarantees: Some lenders ask for a personal guarantee. The problem with this type of loan is that an individual remains solely liable even if the company subsequently defaults. These loans can have significant implications on an individual's financial security, so it is best to avoid them. If necessary, the entrepreneur can try to modify the loan terms.

Create trust: Trusts can help entrepreneurs to protect their assets and grow their businesses. IRS says, "trust is a relationship in which one person holds title to property, subject to an obligation to keep or use the property for the benefit of another."

Legally, a Trust aims to protect assets and can have the power to prevent beneficiaries and possible creditors from obtaining immediate access to assets.

With an irrevocable trust, business owners can get tax benefits, and of course, this benefit will always be subject to the state's laws.

Extra resources for launching a startup

For more information or assistance in incorporating a startup in the US, entrepreneurs can visit the official websites of the government:

Final thoughts and further steps

Incorporating a startup in the US is complex, but the future benefits are worth the effort. There are specific steps to follow to make it easy for foreign and national entrepreneurs to incorporate their businesses. Another way to facilitate the process, mainly if it's a foreign company, is to seek help from an incorporation service that can apply on behalf of a company and guide them through the legal requirements.

Once entrepreneurs have incorporated their company, it is time to start thinking about the following steps to ensure the startup's success in the US.

A new business needs a logo, branding, website, social media content, product reviews, etc., to gain visibility and trust and get clients.

The best way to do it is to hire an agency, to manage all the design and content needs. Brands like Reel Unlimited offer unlimited services like landing pages, UX/UI design, logos, email copy, website content, podcast & video scripts, and more.

Reel Unlimited manages and creates content marketing for Startups for an affordable monthly fee. With this agency, businesses can be sure professional writers and designers are making their content to guarantee a smooth and organic incorporation into the US market.

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