If you own a business in Nigeria and wish to expand your market base across the world without migrating to another country, the easiest and most effective way of doing so is to set up a company in the country in which your target market is located.
For most startups and companies, the United States (US) seems to be the destination of choice for many reasons particularly with regards to fund raising. To know more about the benefits of setting up a company in the United States, click this link for details.
However, from our experience working with Startups seeking to raise funds, setting up a company in the US could be a complex process and a wrong decision made by you in the process could result in your inability to raise funds for your company, losing control of your company or even being deported.
Below are some mistakes non-residents make when registering a company in the US and we hope you will make steps to avoid them when taking steps to set up yours.
1. Choosing the wrong business entity
In our previous article, we dealt extensively with the various kinds of business entities available in the US as well as their liability and tax implications. The two popular business entities in the US are: Limited Liability Companies (LLCs) and Corporations (C-Corp or S-Corp). Each of these entities have their implications in terms of taxes, extent of legal liability, ownership structure, funding, exit options, etc.
Whichever structure you settle for, you must bear in mind that the criteria for owning a company as a non-resident in the US is unique and different from US residents. Besides, laws governing company formation varies greatly amongst countries. This is why we recommend you have a consultation with experienced US based attorneys or International business attorneys to help you decide which entity is suitable for your business goals.
2. Choosing the wrong State to register your business
The United States is made up of about 50 States. Each of these States have laws that are peculiar to them. Choosing which State to register your company in especially where you do not live in the US can be daunting. In addition, the information on the internet can be confusing as well.
If you wish to have physical presence in a particular State, incorporating in that State would be a preferable option. If you are looking to raise funds from investors, Delaware is a preferred option as that is the standard requirement from investors.
However, if you do not reside in the US and you intend to carry out your business remotely, there are additional considerations to be made such as; which State offers better tax incentives, which State has more favorable laws accommodating remote and foreign businesses? Etc.
3. Not consulting with Qualified Lawyers and Accountants
No doubt, there are online filing services available to assist with company formation process. However, these platforms are limited in the services they provide in the sense that they are prohibited from providing legal, tax or accounting advice.
However you choose to set up a company, you must not take these 3 areas for granted; legal, tax and accounting. To do so, you must first speak with qualified experts in these areas to enable you make informed decisions. A local lawyer with expertise in International Business Law or a US based Lawyer, Accountant or Tax- Expert would be able to render the needed guidance in this regard.
We had a case of a startup in Nigeria looking to raise seed funds in the US. The founders had come across an online filing platform and had engaged their services to have their business registered in Delaware. They thought that was all that was required. However, in the course of the fund raise transaction, it was discovered by the investors that the startup already had an existing registered entity in Nigeria which was the parent company. Based on this information, the investors were reluctant to invest in the company since the US company was a subsidiary. The only condition for which they were willing to invest was if a flip enabling the Delaware company become the parent company was done. Due to the expensive and time consuming nature of the transaction, the founders lost the investors.
This would have been avoided if they had made necessary consultations before setting up their company in Nigeria and the US.
4. Little or no understanding of State and Federal Tax Laws.
As stated earlier, the type of business entity you opt for your business, has its tax implications. In addition, the State you choose to incorporate your company has its tax implications as well.
Before you incorporate a company, you must be informed about the Federal, State and Local taxes your proposed business would be liable to.
Bear in mind that Corporations in the US are double taxed. This means that apart from the Corporation being liable to pay income tax, the shareholders are also liable to pay taxes on dividends issued by the said corporation to its shareholders.
You also need to take note of International Tax Treaties between your country where you reside and the US.
5. Considering cheap company registration alternatives
There are two options when it comes to incorporating in the US:
- Pay for execution only services
- Pay for professional advice and execution services
When it comes to advising our clients with respect to company formation in the US, we’ve seen enough to know that every business has its peculiar goals and needs. The challenge with paying for the incorporation service only is that you may not be certain about what is suitable for your business goals and you would definitely be in need of a professional opinion. Since most online US company registration platforms creates little or no room for you to discover which option is best for you, this might be a challenge.
Setting business in a new territory can be quite complex and requires all the expert guidance you can get. So, by all means get one before you incorporate your company.
6. Failing to stay compliant
Setting up a company is one thing, but ensuring you and your foreign business are not acting against relevant laws (such as; tax, immigration laws, etc.), particularly as a non-resident is very important.
Keeping your US company compliant as a non-resident entails;
- Filing your company’s annual report
- Filing and remitting relevant Federal, State and Local taxes as well as adhering to International tax laws.
- Obtaining relevant licenses depending on the nature of your business
- Keeping proper financial records, particularly for Corporations
- Filing notice of key changes to your business, etc.
If you are looking to raise funds in the US from VCs for your company or simply looking to gain access to the US market, there is a company formation plan and structure that works for you and you need to find it from experienced advisors.
Our firm works in collaboration with qualified experts in the US who can assist you with the expert guidance you need to ensure your company formation and operating process is hitch free. If you need assistance in this regard, you may reach out to us through any of our contact information or HERE .
We would be delighted to assist you.