When you're in the Middle East, you wonder why venture capital doesn't flourish so much in this part of the world. Well, it has a lot to do with having the right ecosystem. And in order to get that right, you have to have the community, and that also includes having the ability to set up companies AND letting them fail fast and easily.
If entrepreneurs have to shell out BD 20,000 (USD 53,000) just to start a company with a minimum capital – then startups have very little chance of getting themselves on the runway, let alone taking off. The concept of minimum capital is actually archaic. If you research a bit, you'll understand that this was introduced in the 1800s, and is now being dropped as a requirement by countries who are on the top of the “doing business in“.
After talking to a few entrepreneurs who were seeking funding, the theme was common. Starting up in the Middle East is difficult. This was similar to the voices I heard from Indian founders, but on a different level, in terms of bureaucracy of government. Although I may not have the perfect solution, there is a solution that might be worth trying. I must disclose that I haven't tried it… yet. So take my words with a pinch of salt. Nevertheless, let me save you the trouble of hunting for information and provide it here for your further research. If you get some time, comment on your experience so others can learn…
Set up a Delaware LLC
Yes. In the United States of America, a place called Delaware just south of New York. The reason… its simple, its fast. It's the best way to import jurisdiction, while exporting your assets. 850,000 companies are listed in Delaware, including 50% of all US publicly traded companies, 63% of Fortune 500. Is that enough reason to start one for yourself?
In anycase, read the pros and cons below, and I must warn you – get a lawyer to do the incorporation if there is more than one co-owner/founder. If you want to do the whole thing by yourself, which is a learning experience read the below, but also buy the following books from NOLO – it costs only $74.
- Limited Liability. Only capital put in is risked. (But if member has personal liabilities, his LLC membership can be seized to satisfy the liabilities).
- Single Person can form an LLC
- No minimum capital requirements.
- No AGM or board meetings required.
- There is no publication requirement.
- LLC allows for members & managers to remain anonymous, making it easier to hide assets. Using a Registered Agent removes any reference to the member, thus making it difficult for potential creditors to identify where money has been invested.
- LLC can indemnify members and managers.
- No tax on income derived out-of-state (outside Delaware)
- 850,000 companies are listed in Delaware, including 50% of all US publicly traded companies, 63% of Fortune 500. You are not alone.
- No tax on out-of-state income.
- LLCs are often preferred by venture capitalists and angel capital investors for its predictability.
- Delaware LLCs provide IRS access to all information, unlike Nevada which doesn’t share information making it the most privacy-pro state in US.
- Acts as a ‘pass-thru’ entity for tax purposes… single member LLC is taxed as sole proprietorship and multi-member LLC is taxed as partnership. If required, can elect to be taxed as corporation instead.
- There’s an opinion that its hard to raise debt for LLC. Members may be required to give a personal guarantee for bank loans.
On with the steps to get you started…
Step 1: Choose Name – must contain LLC, L.L.C or Limited Liability Company in the name. Check on https://delecorp.delaware.gov/tin/EntitySearch.jsp and paying $75 allows you to reserve the name for 120 days.
Step 2: Appoint of Registered Agent (RA) – Every LLC must have an agent for service of process in the state. The agent must have a physical address in Delaware and agrees to act accept legal papers on LLC’s behalf if it is sued. (Q: Can RA’s address be used for banking purposes? Will they provide forwarding services to international destinations – check: https://tax-usa.net/US_Business_Address_Secured_Order_Form.htm)
Step 3: File Certificate of Formation – This Form must include LLC name, name and address of Registered Agent (so need to appoint a registered agent first). Pay $90.
Step 4: Obtain EIN – If LLC has more than one member (irrespective of having any employees), it must obtain an IRS Employer Identification Number (EIN) or Federal Tax Identification Number. If LLC is one member, an EIN is required only if it is going to be taxed as a corporation instead of sole proprietorship. No need to pay anything.
Step 5: File Certificate of Registration of Foreign LLC – All LLCs outside Delaware must file this, along with Certificate of Existence, 6 months prior to the filing of the certificate, from the LLCs home state (International?). Pay $200.
Step 6: Arrange a US Physical Address / Virtual Office – Though Delaware LLCs do not require a business office in Delaware, you can get one at http://www.demailbox.com/ for Delaware address or http://www.virtualpostmail.com/ for Los Angeles addresses. If you don’t get a phone number from them or require one, check out http://www.skype.com/en/ (pro) or http://grasshopper.com/ or http://www.onebox.com/signup/ or http://www.ringcentral.com/
Step 7: Open Bank / Merchant Accounts – To make or receive payments, a US bank account should be setup. This may take a few days, depending on the bank. (And might not be as easy before because of all the anti-terrorist regulations). Most banks will conduct a KYC (Know Your Customer), and may ask for the documentation mentioned below, or sometimes a resolution, or certified copies. (Some incorporation firms will ask to pay $599 to Bank Introduction Services). In any case, you need a bank account to deposit cheques payable to the LLC, or have customers pay by credit card or Paypal. Though Delaware LLCs do not require a bank account in Delaware, the banks may ask for a separate physical address (that is not the RA’s address). If you use an international bank in your home (foreign) country, they will most likely have one in Delaware. Alternatively, you can go with one of the virtual banks such as http://www.svb.com/ or https://www.simple.com or https://home.capitalone360.com/ (not sure about https://www.everbank.com/ ) . But always check with the bank as to what documentation they will require.
Your Ongoing Business:
Step 1: Pay Tax – All LLCs (foreign or otherwise) must pay $250 “franchise” tax by 1 June each year. Payment can be made at: http://www.corp.delaware.gov/paytaxes.shtml but it is advised to obtain a tax advisor to advise you as a non-US-resident.
Step 2: File Annual Report – File the annual reports.
Step 3: Maintain Registered Agent – Pay him. Or suffer :)
Documentation: May require copy of your valid passport, utility bill or proof of current residence (tenancy contract or rental agreement might suffice), bank reference letter from your bank (foreign), government issued identification (central population registration card, smart card) or driving license – are some of the documents worth keeping ready.
- Operating Agreement (OA) – An LLC operating agreement is not required, nor needs to be filed with Certificate of Formation. It’s a nice to have, and helps governs the company’s operations. An operating agreement allows you to structure your financial and working relationships with your co-owners in a way that suits your business. In your operating agreement, you and your co-owners/members establish each members/owner's percentage of ownership in the LLC, his or her share of profits (or losses), his or her rights and responsibilities, and what will happen to the business if one of you leaves, transfers of membership interests. The Operating Agreement must specify, for each type of action, whether majority, super-majority or unanimous approval is required. Also, having an operating agreement will present to the courts a legal structure to be treated as a separate entity rather than as a sole owner. Lend’s credibility. This will also having state rules apply to you e.g. for co-owned dividing up profits equally as per state rule, can be over-ruled with an operating agreement. OA needs to deal with 1) allocation of capital, 2) distribution of cash and 3) voting rights. Ownership interest must either be in the Articles of Organization or OA.
- Dissolution – To dissolve an LLC, Certificate of Dissolution, or Certificate of Merger etc must be filed, and until then the franchise tax accrues.
- MUST Keep Personal & Business funds separate – don’t commingle.
- MUST Use Business Title when signing business documents, so no one argues that you were signing in personal capacity
- MUST Register Doing Business As (DBA) name…
- MUST require Articles of Organization (not Incorporation).
- Adding Member to LLC – The OA must be amended to include the addition/change of members units or percentages. (And signed by new and continuing members).
Remember, this is only for education purposes, I'm not your legal adviser, so don't ask me questions. Instead check out Dana Shultz's blog to ask any questions.