How to incorporate a US Corporation from outside the USA?
blog.freshdesk.com
blog.freshdesk.com
I considered a similar path, since here in Australia we are very similarly constrained[2]. However I was not willing to accept the risk and complexity of incorporating in an unfamiliar legal/financial jurisdiction and I really don't feel the OP has made me any more comfortable although they seem flush about it.
Since I have an alternative billing model available that will be acceptable to my customers, I've abandoned the whole subscription approach in favour of annual prepayments.
Instead I have added "solve Australian online service billing" to my list of possible future projects (not a pipedream, issuer/acquirer systems knowledge is in my utility belt).
The guys at Pin (www.pin.net.au) will, hopefully, beat me to it, and I wish them the best because it's a problem seriously needs solving for Australian startups.
[1] Neither Paypal nor Worldpay's recurring options are palatable to me - both are seriously underspecified, and are UX catastrophes to boot.
[2] There is one option available; there is one bank that offers USD-capable merchant accounts, and the signup takes months of paperwork, and has huge up-front and per-txn fees, at least huge from a startup POV.
I haven't used it, but it seems to be Stripe-for-Australians...
Edit: now I've read your post properly I see you have seen Pin.
It could be (but I don't know) that while Australia is not too far from the US in terms of the legal/financial stuff, India is not so great, so it's worth going to the US in any event. For instance, here in Italy, I don't think that highly of the legal system, so there is a bit more incentive for some people to take the risk and go abroad like this. Of course, everyone needs to evaluate it according to their own situation.
From stories I heard in the past, I was expecting a horrible experience (banks not being able to grok the concept of digital goods etc). Turns out that either the stories were a furphy or banks have gotten a lot better.
Here's the process I went through.
1. Application
2. Set up a single page website to give a brief overview of product
3. Include TOS and returns policy (adapted from wordpress.com)
4. Wait 7 days for approval
Thats it. One week to get a merchant account with no prior business history. The rates are fairly standard:
1.4%/trans, $33 monthly, $44 anual fee, $33 chargeback fee
I think off the top of my head those rates beat those provided by paypal, stripe, etc. although I'm happy to be corrected if anyone has up-to-date info about them
I'll also be paying $300/yr for gateway fees since I have no desire to handle CC details directly.
When we clarified that we required online payments, he chuckled and said 'oh, no way we do that, it is far too dangerous'.
He then proposed a compromise solution where we collect credit card numbers and then punch them manually into the terminal to process payments.
We ended up incorporating in the USA.
I ask because merchant accounts denominated in AUD are widely available, but for USD it still appears that only the NAB have multi-currency support.
To your question though.. no I cant bill directly in USD. I am very new (and ignorant) to receiving online payments, so I'm really curious what the issues for Americans are. The on-line currency converters are accurate to (I would guess) +- 1hour currency fluctuations so would give a very accurate estimate (to within cents) of the cost of a transaction... Wouldn't this be good enough?
Otherwise if this is an issue then paypal should do the job... 2 mins to set up and gives an alternative option.
Would be good to hear your own personal experiences.
It's a marketing disaster, in fact, and would look completely amateurish.
Paypal is never Plan A.
Stripe/ Pin are great but still don't solve multi currency, Pin is offering USD and AUD, haven't seen any rates from them yet though.
As an Australian consumer I'm used to paying in USD and simply seeing a slightly different amount show up on my transaction history (AUD being generally at parity with USD)
Is having multi-currency support important? Does it impact sales? Is using something like money.js to give a close estimate of actual cost good enough?
I think it helps with localised branding. Sure we are really just one website, with one shipping location (and we aren't hiding this fact). But displaying GBP prices and charging people exactly that price, in the currency they are used to, without any international transaction fee popping up makes a difference.
This, along with creating a local phone number and physical address, gives the customers a better feeling that you are localised to their country.
Of course we haven't actually tested this both ways to see what the difference would be.
Whereas the ROTW is pretty much accustomed to being billed in USD online and the impact is far lower.
For me, for my market, AUD+USD are mandatory and optionally GBP/EUR are a strong plus.
If you want the money to be funnelled to a company in your local country then you need a set up a Transfer Pricing Agreement. This basically means that your local company charges the US company for services rendered, and the US company charges your customers. You pay local tax on whatever goes to your local company and US tax on whatever remains. The hard part is determining a percentage.
I believe that the rules for this are different per country, but in our case (New Zealand), we needed to set up what is called an "Arms Length Agreement". That is to say, you need to be able to prove that the relationship you have could have formed between any two unrelated companies.
As we are a game company, we called our US company a publisher of our game and we did a 70/30 split with it. This is justified by the fact that you can get a 70/30 split with a fair number of other methods for publishing independent games (for example, the apple app store).
All up we paid several thousand for legal advice and incorporation costs.
The percentage is determined based on a "Transfer Pricing Study" of related service companies in the foreign jurisdiction (or region, depending on the industry).
Tax authorities are very quick to challenge transfer pricing arrangements, especially those arrangements lacking documentation of how the percentage was selected. (The agreement will do nothing to help you in this regard. The % is what matters in proving that the relationship could have been formed between unrelated companies.) If the TP arrangement is disregarded, the money paid to the foreign company will be recharacterized. The danger is that the income will be treated as passive dividend income, rather than as "active" income. The distinction between active and passive can affect applicable tax rates, offsets, and other tax consequences.
Many accounting firms and even some law firms will provide transfer pricing studies for relatively low cost, but expect to pay low-to-mid 5 figures.
In the OP's post, Freshdesk only has a single company, located in the U.S. It will be (relatively) expensive for Freshdesk to transition to a multi-entity structure that can take advantage of transfer pricing in the way that Negativefrag's company has.
Ask HN: How to setup a company in U.S. without being there?
Seems to me two reasons to set up in the US:
1. For US-based investment 2. For taking payments using excellent services like Stripe, Braintree etc
#2 should be inspiring localized entrepreneurs all over the world. Fix the payment problem and 'boom', instant business.
I find the 'just make the core features work' part interesting. Make my core business processes work with no glitches at a 'reasonable' cost.
I would be interested in a freshdesk tech stack blog entry?
- It appears that the OP will be subject to at least a 15% withholding rate on dividends paid from the US Corp to the Indian parent in addition to the U.S. corporate income taxes paid.
- All IP and IP rights are owned by the U.S. corporation, which will make a future IP migration offshore very expensive. As in, minimum six-figures expensive (possibly even into 9 figures). This could be a serious deterrent to foreign acquirers. IP should be held offshore to the extent possible. Note that holding the IP in the U.S. also has implications for future expansion, as it prevents the use of the most cost-favorable transfer pricing arrangements.
- Worldwide income is subject to U.S. taxation. Their costs will not scale with their income, which will make this very expensive. (U.S. income taxation is preferrable to foreign jurisdictions only if costs scale with expenses, because special deductions or credits in the U.S. tax code can lower the effective tax rate below 10% or even 0%).
Incorporating in the U.S. is easy. The hard part is getting a tax-efficient structure. The OP's structure is not tax-efficient. This will not matter as long as they do not have profits, but it will haunt them once they start having serious earnings or start receiving serious acquisition offers.