Forming a US Corporation: Pros and Cons

Like any other form of business, the US corporation has its pros and cons. Among the most important benefits are the following:

-It can issue a virtually unlimited number of shares.

-The shares can be of different classes.

-It allows a well-structured management system, including a board of directors, president, vice-presidents, CEO, other top managers, and an annual meeting of shareholders.

-The corporation has a well-known and transparent system of decision-making: the shareholders meeting elects the board of directors, which in its turn appoints the president, CEO, and other top officers.

-It also allows to elaborate and implement sophisticated tax strategies and planning.

The most crucial disadvantage of the US corporation (C-Corporations) is its “double taxation“.  In America, corporations pay taxes on their declared profit on the corporate level. Then, after the distribution of dividends to the shareholders, they pay their taxes. However, it is not a problem for most public corporations because even giants like Google and Amazon don’t pay dividends.

Usually, double taxation is not a problem for US startups either. First, at least in the beginning, they don’t have any profit. And when they do, they usually reinvest it because the top priority for any startup is the growth of its capitalization rather than the distribution of dividends. Another way to avoid double taxation is paying salaries and offering company stock options instead of company dividends.

A corporation will not pay any taxes on the corporate level if it becomes a small corporation (S-Corporation). To do that one should register a regular corporation first and then file the IRS application for the status of a small corporation. Once you get a letter from the IRS with their approval, your company becomes an S-Corporation.

However, small corporations (S-Corporations) have certain limitations:

-Their members (shareholders) can be only US citizens and permanent residents

-They cannot have more than 100 members

-They can issue only one class of stock

Thus, foreigners cannot be shareholders of a small corporation. Most startups cannot use this type of corporation either.

Setting Up a Startup in the USA

If you are going to form a US startup, you should register a corporation. Moreover, it should be a regular or C-Corporation registered in Delaware because this is the preference of most institutional investors and venture capitalists.

The C-Corporation is a well-known and proven type of business structure in the venture capitalist community. It allows addressing the interests of all parties at different stages of a startup project up to its sale or an IPO. The C-Corporation can attract a virtually unlimited number of investors and address their needs by issuing a necessary number of shares. It can also accommodate startup founders’ interests by giving them a different type of stock with multiple voting rights.  

American institutional investors and venture capitalists generally follow standard procedures when investing in startups. One of them – the startup should be registered as a Delaware C-Corporation. There are several reasons for that:

-All US law school students study Delaware law. Thus, every corporate lawyer is familiar with it.

-The Delaware legal system is business-oriented.

-Delaware has the Court of Chancery – a special court dealing with corporate disputes only.

Therefore, the Delaware C-Corporation is considered the standard among institutional investors and venture capitalists.

Post-Registration Legal Services

Whether you are ready to register a corporation in the USA or still to consider your options, get in touch with us . We will help you evaluate your situation and suggest the type of company that will work for you. The first counseling session for new clients is free of charge.

We will register a corporation in the USA for you and help you set up and start your business in America. Our specialists will walk you through the whole process, providing legal advice on every step of registration and setup of your company. You can also count on us whenever you need legal advice or help in your business’s strategic planning or logistics in the United States.