Startup founders tend to spend a lot of their time building a business from the ground up. This doesn’t leave much bandwidth for becoming intimately familiar with a foreign jurisdiction and its byzantine business regulations. Founders based in countries outside the U.S. are at a disadvantage in this respect, because incorporating in the U.S. can bring advantages for startups that want to expand internationally, target U.S. customers, and attract new investment.
The good news is that the requirements to start a business in the U.S. are pretty manageable. You don’t even need to be a U.S. citizen or resident to do it. Most foreign founders focus on starting a business in Delaware, a U.S. state that’s famous for its business-friendly tax and corporate legal system. It’s not the only state where foreign-owned startups can incorporate, but it has some advantages that other states don’t offer.
In this guide, we’ll review some of those advantages and discuss exactly what goes into starting a business in Delaware. Though our guide is primarily intended for foreign entrepreneurs and foreign-owned startups, the steps to incorporating in Delaware are generally similar for startups owned by US citizens and residents.
Why should your startup incorporate in Delaware?
Delaware is one of the smallest and least populous states in the U.S., but it makes up for its diminutive stature with its well-earned reputation as a hub of global business. More than 1 million business entities are legally incorporated in Delaware, which means that the state is home to more incorporated businesses than actual people.
There are several reasons why international startups flock to incorporate in Delaware. The state has an entire infrastructure set up to support seamless incorporation, along with several other key advantages that make it an attractive business home:
- Business-friendly corporate requirements. Delaware requires only one person (a Delaware Registered Agent) to maintain an address in the state. This is especially appealing to non-U.S. citizens and residents, who may not be willing or able to uproot and move to the U.S. And don’t worry—you don’t need to personally know someone in Delaware to incorporate there, because there are a ton of services that help out with providing a Registered Agent, address, and other requirements for incorporation.
- Business tax benefits. Delaware does not collect corporate income tax from companies that don’t conduct business within its boundaries. It also doesn’t tax stock if the owner lives out of state.
- The Delaware Court of Chancery. This is a specialized non-jury trial court that adjudicates a wide range of corporate cases. The Court of Chancery has a massive body of case law and precedents to draw upon for its decisions, and it is known for processing cases quickly and with predictable outcomes.
- U.S. venture capital firms and other investors prefer it. VCs generally like to see things they’re familiar with, and there is perhaps nothing more familiar to a VC firm than a Delaware C-corp. If you have any interest in attracting U.S. investment or even one day going public, starting a business in Delaware may be a good idea.
8 steps to starting a business in Delaware
Now that we’ve reviewed some of the benefits to starting a business in Delaware, a big question remains: How do you actually do it? Let’s review the basic steps to starting a business in Delaware, from choosing a business structure to opening a US business bank account.
1. Consider your timing
Is starting a business in Delaware really necessary for your startup to take the next step in its development? It depends.
There are several reasons why incorporating in the U.S. can make good sense for a global startup. If you have a concrete plan to market your products to customers in the U.S. and around the world, there are some advantages to having a U.S.-based company.
For one, the U.S. (and Delaware specifically) have a number of standardized procedures and mechanisms that help startups handle some of the challenges of running a global business. Having a business located in the U.S. can make it possible to use global payments platforms and apply for a US business bank account. And if you decide to incorporate as a C-corporation, you’ll find a number of services that offer standardized templates and streamlined support for setting up corporate bylaws, managing equity, and more.
As noted above, starting a business in Delaware can have major implications on your ability to raise money from U.S. investors, too. Just be aware that it comes with upfront costs and ongoing maintenance costs that can add up. It probably doesn’t make sense to pay these costs—and go through the work of incorporating—if you aren’t ready to benefit from the fruits of incorporation.
2. Determine your business structure
The next step to starting a business in Delaware is determining the legal structure for your business.
There are a number of different legal structures, though not all of them are applicable to or appropriate for a global startup. You can find key information about all of the available legal business structures in this table, but we’ll focus on the two types that are probably most applicable to your case: C-corporation and Limited Liability Company (LLC).
A C-corporation is a type of corporation, which we’ll define as a legal entity that’s separate and distinct from its shareholders, officers, and directors. What makes a “C-corp” a C-corp comes down to how it’s taxed. A C-corp is taxed separately from its owners, which means that the corporation must pay corporate income tax on its earnings, and its shareholders must also pay taxes on any dividends distributed to them individually. In spite of this double-taxation issue, incorporating as a C-corp can have some distinct advantages:
- It’s easier to raise venture capital with a C-corp. Investors love C-corps, and they specifically love Delaware C-corps. If you’re starting to plan out your funding rounds, this is probably the way to go.
- C-corps can compensate employees with equity. C-corps are able to issue stock, while other business entities (such as LLCs) are more limited in what they can offer employees.
- Other jurisdictions are familiar with Delaware C-corps, too. Corporations can be found all over the world, and any other jurisdictions you do business in will likely recognize your Delaware C-corp. In general, a C-corp may offer more clear-cut legal frameworks and protections around the globe than other business entities formed in the U.S.
Another business entity type you may consider is a limited liability company (LLC). This is a relatively simple type of business entity that, like a C-corp, offers limited liability protection for its members. As a “pass-through” entity, it can also pass through taxes to its members, who can recognize profits or losses from the business on their individual tax returns.
LLCs may offer more freedom and simplicity than corporations, but they’re less appropriate if you need to attract investment, plan to grow your company at a high rate, and want to offer employee equity in the near future.
If you’re not sure which legal entity to choose, we recommend consulting with a qualified expert. For additional information, you can also check out our guide for more on the tax and accounting implications of setting up a C-corp vs. an LLC.
3. Settle on a name that isn’t already registered
Choosing a name for your business is important, too—though you’ll need to make sure that your preferred name isn’t already taken. The state of Delaware offers a name database you can search to see if your desired name is available. With over 1 million incorporated businesses, it’s not a given!
Once you’ve settled on a name, you can reserve it via an online application for a fee of $75. Your reservation will remain effective for 120 days, though you can renew it or re-reserve it after that initial time period expires.
4. Enlist a Delaware Registered Agent
While you don’t need a physical office in Delaware to incorporate your business in the state, you do need a Registered Agent if you plan on forming a C-corp or an LLC. There are a number of services that offer a Registered Agent with a physical mailing address, which is another requirement for incorporation.
This Registered Agent will essentially act as your “on the ground” representative in the state, receiving official papers, legal notices, and the like. When forming your business, this person’s name will need to be recorded in either your articles of incorporation (C-corp) or articles of organization (LLC).
5. Incorporate your business
Assuming you have all of the above in order, you should be ready to form your new business entity in Delaware.
The state has a helpful online portal that walks you through the steps and allows you to fill out your entity forms online before uploading or mailing your paperwork to the Delaware Division of Corporations. You can also work directly with your Registered Agent service to handle the formation of your business, as many services offer this for a fee.
If your company is already incorporated in a non-U.S. country, you may be able to change your corporate structure and establish a Delaware C-corporation as your U.S. holding company. This process is known as a Delaware flip, and you can learn more about it in our guide to how to do a Delaware flip.
6. Apply for an EIN
Generally speaking, every business in the U.S. needs an Employer Identification Number (EIN). Otherwise known as a Federal Tax Identification Number, this nine-digit number is used to identify your business for tax purposes.
You can apply for an EIN online via the IRS website. You’ll need the name and Taxpayer Identification Number (SSN, ITIN, or EIN) of your business’s responsible party. This can be a true principal officer, general partner, grantor, owner, or trustor.
7. Get essential documents, licenses, and certificates
If your startup falls into the category of a particular regulated industry or profession, you may need to apply for additional licenses or certifications before you can conduct business in the state. You can find a list of regulated industries here.
A Delaware Registered Agent service should be able to help you with this as well as the other documentation required. We also recommend working with an attorney and tax expert to ensure that you have all of your accounting and bookkeeping in order, as you’ll need to start paying U.S. taxes once you incorporate (and the penalties for not doing so in a timely fashion can be quite high).
8. Open a US business bank account
Speaking of taxes and accounting, you’ll also need to open a U.S. business bank account. Corporations and LLCs operating within the U.S. are required to maintain separate accounts for their business’s finances and their owners’ individual finances.
While many traditional banks require you to physically go to one of their branches to open a business bank account in the US, others allow you to do so entirely online. For example, Levro offers a multi-currency bank account that you can apply for online even if you don’t yet have an EIN. (You may be asked to provide your EIN verification before you can open an account.)
Levro’s U.S.-based bank accounts are designed with global startups in mind. Businesses can use our platform to buy, sell, and hold more than 30 global currencies with easy multi-currency accounting. Contact us to schedule a demo today.
Next steps after starting a business in Delaware
Starting a business in Delaware (or elsewhere in the U.S., such as Wyoming or California) can be an exciting milestone for a global startup. It can also open up new pathways to growth, both within the U.S. as well as internationally.
But it’s definitely not the final step in your journey. Now that you’ve started a business in the U.S., you’ll need to stay on top of your ongoing taxes and accounting requirements, which include paying state fees, withholding the appropriate taxes from your employees, and filing IRS Form 5472 (along with any other tax forms you may need as a foreign founder).
If you have additional questions about how Levro can help you stay compliant with U.S. banking requirements and reduce the time and effort you spend on accounting, send an email to email@example.com today.
Next steps after starting a business in California
Starting a business in California may not be the last step on your road to ultimate success. For example, if your startup later decides to court angel investors and VC firms, you may consider reincorporating in Delaware by creating a Delaware C-corp and merging your California corporation into it.
But for now, you have a business to grow—and Levro is here to help. If you want to learn more about how Levro can help you stay compliant with U.S. banking requirements and reduce the time and effort you spend on accounting for your new business, send an email to firstname.lastname@example.org today.