Three Ways to Expand to the US Market; A Refresher on US Incorporation Best Practices
We recently brought in Scott Smedresman of McCarter & English to talk to our startups on how best to begin operations in the US. Below I’ve shared Scott’s take on the best practices for incorporation and operations in the US. Have any questions or want real legal advice for your startup? Reach out to McCarter & English, ranked by Pitchbook as a top 10 law firm for venture capital and startup law.
Have a clearly defined vision
When looking to first do business in the US your team must be clear on your goals. Are you looking to have many client relationships in the US? Are you looking to hire a team on the ground? Are you looking to raise venture capital? Once you’ve set your roadmap, you can use the guidelines below to assist you in preparing for your legal needs.
If you are simply looking to sell your services in the US and have the rest of your business run outside of the country, opening a branch office may be the way to go. On day one in the US, you can operate as a branch office. However, the second you decide you want to hire on the ground, you will likely want to consider transferring to a subsidiary. Hiring will require you to file taxes in the US and require your company share finances with the IRS, which could be costly and potentially undesirable. Furthermore, operating your office exposes your company to potential lawsuits and as you expand operations you may want to shield your company from such risk.
Want to hire a team? Try a subsidiary
If your company wants to have a team on the ground and also to be shielded from liability, consider opening a subsidiary. Subsidiaries cost more to begin (with a spin-up cost of $2–5k) but are separate legal entities that shield your parent company from liability and also allow you to file simplified taxes, excluding the parent company business. While subsidiaries are great options to operate locally in the US, you will have difficulty getting US investors to fund your subsidiary alone. Investors will want a chunk of the parent corporation and are rarely inclined to invest in a country whose legal practices they are not familiar with.
And the gold medal goes to… The Delaware flip
If your company wants to operate and scale in the US with the support of a VC investor, the “Delaware flip” is likely your best option. The reincorporation process can be costly, around $5–7k, will come with new tax implications in your home country and cost a larger sum to remain compliant under US federal and state law; however, the Delaware flip is often required by U.S. equity investors before making an investment. In the process of reincorporation, previous investors and company owners will need to sell their shares to the new Delaware corp in exchange for the same amount of shares in the new entity. Investors generally feel more comfortable investing their money in this new U.S. entity, since they usually have experience working within the bounds of such a corporation and U.S. laws and practices.
Scott Smedresman is a partner at McCarter & English LLP.
Scott primarily represents early and growth stage technology companies in structuring, formation, financing, intellectual property, licensing, technology and data matters, and exits. In addition, he represents clients in disputes regarding technology and IP, both in and out of court.
Scott works with companies through the full technology lifecycle, from structuring early stage companies, closing financings, planning IP strategy, developing and launching products, building customers and scale, acquiring technology assets and ultimately through exit. He is experienced in working with startups as they scale, routinely negotiating customer deals and strategic partnerships on behalf of these companies opposite Fortune 500 companies.
Maor is the Program Manager at NUMA New York.
Maor supports program operations and outcomes alongside NUMA’s Program and Managing Director. At NUMA, Maor has ensured cohort startups have immediate access to all program assets, as well as a smooth experience throughout the program.
Prior to working at NUMA, Maor consulted for Israeli startups on US market-entry and how to obtain funding domestically as well as abroad in the US.