The first step to incorporating a company in the United States is to file a Certificate of Incorporation (COI) with the Delaware Secretary of State with an initial authorized capital of 10,000,000 shares of Common Stock and a low par value of $0.00001 per share. The Delaware corporation is incorporated within 1-2 business days of the filing of the COI. Once the Delaware corporation has been formed, the Company then obtains an Employer Identification Number (EIN). If any of the founders or others involved in the Company has a U.S. Social Security Number (SSN), then the EIN can be obtained very easily; otherwise, it takes a few additional days to obtain the EIN for the new Corporation. The initial incorporation of the Company costs only around $350, including state service and registration fees.
2. Formation Matters.
Once the Company has been incorporated and bank account set up, the initial Incorporator resigns and appoints the initial Board of Directors (Board). The initial Board approves the issuance of shares to the founders, appoints the initial officers of the corporation and approves other administrative tasks like opening a bank account.
The Company can open a bank account once the Company has obtained the COI and EIN number and the Board has approved the opening of the bank account.
Once the bank account is set up, the founders would then purchase the initial founder equity. If any of the founders are resident in India, then it is important to consider how best to structure the purchase of their founder shares in compliance with RBI regulations and India’s Foreign Exchange and Management Act (FEMA). If the founders have money available in a U.S. (or other non-India) bank account, it is always preferable to purchase founder shares with that amount as long as the original source of that money was also from outside India.
3. Capital Structure.
Typically, a large portion, as high as 80-90%, of the initial authorized capital of 10 MM shares of Common Stock is issued to the founders. It is advantageous for the founders to purchase the 8-9MM shares initially at a very low price of $80-90. If the initial founder stock is structured properly and timely, and 83(b) tax elections are timely made, the founders should not have to worry about tax implications arising from their stock purchase until they are ready to sell that stock. Founder stock should also be structured with vesting such that in the event any of the founder leaves, the Company has the right to repurchase that founder’s unvested portion of stock. This is important to protect the Company and also the other founders in the event any one founder leaves early or has to be fired. Investors will also pay particular attention to this issue. The most accepted vesting schedule is where founders vest monthly over a 4 year period, starting from the date of purchase of their founder stock. The remaining 10-20% of the initial 10MM equity is reserved as part of an Option Pool that can be issued for issuance to employees, advisors and consultants.
4. India Subsidiary. Once the U.S. corporation has been formed, the Board and Officers appointed, and the initial founder stock issued, the U.S. company would then form a subsidiary in India, and all the key employees in India would become employees of the Indian subsidiary. Employees of the India Subsidiary can also be granted options in the Option Pool of the U.S. Parent Company.
The U.S. and India company would also enter into a Master Services Agreement pursuant to which the U.S. company would hire the India company to provide services in exchange for service fees.
It is important to structure the MSA and the service fees properly in order to comply with transfer pricing regulations in India and the U.S. It is also important to take into account where the decision-making and control of the U.S. company resides so as to overcome any potential claims that the U.S. company is controlled from India.
5. Immigration Issues. If you are resident in India and form a Company in the U.S., then you also need to consider the various options to travel to the U.S. on a valid visa. The various options are: a B-1 or Business Visa, H-1 or Work Visa and an L-1 or Intra-Company Visa. Each of these options has respective pros and cons and founders need to consult with an experienced immigration lawyer to determine which option works best for their situation.
In summary, while setting up and operating a U.S. company is relatively easy and inexpensive, many founders, specially those resident in India, end up making mistakes in signing up with inexperienced advisors or seeking help from online sources, resulting in tax, regulatory and/or immigration issues that many times become difficult or impossible to resolve at a later stage. Therefore, it is important that founders consider getting experienced advisors involved early on in the process.