Setting Up A US Subsidiary #SaaS

Earlier this month, we had a long conversation on how entrepreneurs are making the move to the US. I would really suggest you read the post on what the pre-move prep founders need to do.

But there is one thing we didn’t talk about. How do you incorporate a company in the US? If you work in a country, it’s easier if you can bill in the country. Let’s begin with putting a disclaimer. This is meant for first-time founders who mean to set up a company in the US. This is not meant to be a replacement for the advice and the help a qualified CA or a professional will give you. This meant to be a guide, something to help you understand how the process works.

Let’s start

We live in an age where data is king. If this world was a chessboard, to win the game and to keep winning it, the king has to be protected, at all costs. And that’s what Borneo does. It is a data security platform that was born in the year 2020, the cloud era, where remote working, distributed time zones, and Zoom calls are the new normal.

This is a world where everything — including your co-workers, customers, investors, vendors, IP, data — is spread across the globe. Where the words global and distributed have taken on a whole new meaning. One doesn’t need to look too far for an example. Borneo is one of those ‘global’ companies. It is headquartered in Singapore, with people in the US, India, and Canada.

So if you have a presence in the US, one might ask, why do you need a US subsidiary? For Borneo, there were two key drivers: the customer base that is predominantly in the US, and the access to a global deep-tech talent pool. The States has a large pool of investors, offers insurance and tax benefits, along with access to talent and US customers. These are the very reasons B2B companies make similar moves.

Hiring alone is never the reason. If your goal is just to hire then you don’t have to go there and set up a subsidiary. There are several companies out there that can hire and manage employees for you. So before you go down this path you need to be clear on the ‘why’.

Once you are convinced that you are making the right decision, the next major question is ‘how’. How to set up the subsidiary. This was the process we at Borneo followed.

1. Company Incorporation

The first thing we did was to incorporate the company. The fastest and easiest way is to form a simple subsidiary in the state of Delaware, which allows partial tax exemption to companies that weren’t formed in the state of Delaware.

  • The first step for us was to engage a counsel in the US and authorize their work to form the subsidiary.
  • Next, you need to work with your local counsel and corporate secretary to create the documents to authorize the creation of a new company. You need to prepare the board resolutions, and approve the incorporation of the US Subsidiary.
  • Here’s a list of things you need to have handy to send to your legal counsel in the US.

1. Country of Subsidiary (in full)

2. Proposed Name of Subsidiary. (Counsel will validate the availability of the name by searching the Delaware Secretary of State’s official website.)

3. Details of Initial Share Capital.

4. Proposed Business for Subsidiary.

5. Number and type of shares in the Subsidiary.

6. Amount of Capital.

7. The names of the initial officers and directors.

  • Then you need to make a Common Stock Purchase Agreement with the Parent company. For example, you can start with a very simplified capital structure — 1000 shares of common stock, par value $0.00001 per share, wholly owned by the parent company.
  • Next, you will need to name a President/CEO, Treasurer, and Secretary. These positions may be held by the same person. You also need a secretary to facilitate the filing of paperwork. For us, our counsel doubled up as the secretary.

Note: Please verify this with your local and US counsel, as the requirements might be different for your line of business, and jurisdiction.

Once you have the certificate of incorporation, now you need to apply for an EIN.

2. EIN Application
Employee Identification Number (EIN) is key for doing any business in the USA. It is a unique nine-digit number that the IRS assigns to organizations, similar to the Social Security Number ( SSN ) assigned to individuals. EIN is required for pretty much every business transaction, including bank accounts, tax returns, payments to employees and contractors.

In case you are planning to engage an accounting firm to take care of your monthly bookkeeping and annual tax filing in the US, then they can help you with the EIN application.

3. US Address
Authorities such as the IRS / states will need an address where they can communicate with the company. If you do not intend to have a physical office location in the US and all your employees are working remotely then, you can either use the address of your legal counsel as the official communication address or you can get a virtual address.

4. CA EDD Registration
If you operate a business and employ one or more employees in California as we did, you must register as an employer with the EDD or the Employment Development Department. EDD is a department of government that administers the Unemployment Insurance, Disability Insurance, and Paid Family Leave programs. If you have employees in other states you have to register as an employer in the given state.

5. Good Standing Certificate from DE
This is a prerequisite to registering with the State. It verifies that a corporation was formed legally, has been properly maintained, and is still active. Another thing to bear in mind, make sure you apply for the certificate well in advance. The entire process takes about two to three weeks.

6. Register with the Secretary of State
If you have employees in California, your company has to be registered with the Secretary of State for CA. It is important that you do this for payroll. insurance company, etc. check that you are registered with the state before they proceed to process your insurance application for employees.

7. Setup Bank Account
If you have the EIN letter and Certificate of Incorporation, the Bank Account setup is quite straightforward. We went with Silicon Valley Bank (SVB). We were able to open the bank account within three weeks of our first chat with the SVB official.

If you are in a hurry, you can also sign up with platforms such as Wise in the interim till your bank account is set up.

8. Local Payroll Service Provider
We went with Gusto to manage our employee payroll. They also support the hiring process and insurance for employees. It is quick and easy to start on Gusto.

That was our journey setting up a subsidiary for Borneo in the US. While the process is mostly the same for everyone, there might be some variations in the process for different companies. What those changes would be will depend on the states you are doing business with and the cities or states your employees are located in.

There are other things to consider while you make your move to the States. So, we’ve made a comprehensive list to help you figure out the maze that this transition process could be.

Additional Resources
If someone is starting a new company, they may want to create the US entity first and make the Indian entity a subsidiary.

When creating the US entity, there are online services such as Stripe Atlas which will do all the work mentioned above, including applying for the EIN, for a low price of $500. Stripe, for those who don’t know, is a multi-billion dollar company, that was started with the explicit purpose of helping people outside the US to start a company in the US.

What is the type of company you are creating? This is a critical choice and in this stage, the founders need to make this decision promptly. So, if your goal is to bring in investors, the default choice is Delaware C-Corp. The S-Corp and LLC wouldn’t be ideal in this case of a growing startup with the idea to bring in investors, and customers in the US.

Another question to ask yourself. Will the US entity be the parent company or subsidiary? It’s a personal choice depending on your business model. Here are a few points to consider while making the choice.

  1. If you plan to have customers in and investors from the US, it may make sense to make the US entity a parent company.
  2. If an Indian company is the parent company, your US investors have to wire the money to India which isn’t that easy compared to transferring to the US.
  3. Likewise, if your investors will be from India, most of them have funds located in the US, Singapore, or Mauritius which makes transferring money a lot easier.

A thing to remember, it is advisable to incorporate a US Holding company and make the Indian company a subsidiary. This proves to be useful because the human capital is usually based out of India. While the customer base is primarily in the USA. The Indian company can bill the US entity on a cost-plus basis. From a taxation and transfer pricing perspective, this model is the most effective. The investors too prefer investing in a holding company rather than its subsidiaries.

For the shares to be held by Indian founders in the US entity, the FEMA regulations should be a point of consideration. Appropriate documentation has to be done to ensure there is no round-tripping from India. Here, a CA/CS/Lawyer should be consulted.

If you already have an Indian entity and are creating the US entity, be clear on which one to be the parent entity, and how your existing investors will be transferred to the parent entity. There are many legal companies in India that are good at cross-border transfer or flipping the parent company.

Opening a bank account can be done virtually using Brex, Mercury, Wise, and Silicon Valley Bank. All of these also come with many credits for startups.

There’s ongoing compliance to pay the Delaware franchise fees every year on March 1st, and that cannot be missed at any cost irrespective of your business activity.

First-time founders need all the help they can get. There is an excellent blog by Girish Mathrubootham written back in 2010 when he was incorporating Freshdesk in the USA. It is a step-by-step breakup of the process. Reading it is highly recommended. Also Suresh Sambandan updated this here

As you take your company across the seven seas, we hope that this resource will help you make your transition easier. We wish you good luck in building a global business.

Guest Post by Prithvi Rai. Prithvi is the Founder & CEO of Borneo. His ambition is to secure user trust and that’s what Borneo does. Prithvi has spent two decades in leadership positions across Uber, Facebook, and Yahoo! Additionally, he is an Entrepreneur in Residence at INSEAD, an active investor, and advisor to numerous technology startups, and VC funds. He lives in Singapore with his wife and six-year-old son.