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Stripe Atlas rocks, but European founders should learn to drive before jumping into a sports car

Daniel Glazer of Fried Frank LLP, weighs in on Stripe’s Atlas program and the considerations European startup founders need to make before deciding to tackle the US market.

Many emerging companies considering expanding to the US have asked us about Stripe Atlas, Stripe’s new offering that cost-effectively combines Delaware incorporation, a taxpayer identification number (EIN), a Silicon Valley Bank account and integration with the Stripe payments network.

The concept is clever: the eased access it provides to a US bank account and to Stripe is welcome, and we heartily endorse providing initial set-up services to early-stage companies for relatively low fixed fees.

However, as noted in the Stripe Atlas FAQ, operating through a US company carries with it significant tax and compliance responsibilities, as well as potential liability risks.

Non-US entrepreneurs need to understand these considerations before deciding to set up operations stateside. Gaining access to the world’s largest commercial market is well worth the entry costs, but the strict US legal and regulatory environment can significantly increase those costs if proper care isn’t taken.

Put another way: Stripe Atlas helpfully provides the keys to the Ferrari that is the US market; companies should make sure they know how to drive before getting behind the wheel.

The US tax environment is complex. Corporate income tax is imposed at both the federal (national) and state levels, and a corporation may be subject to state corporate income tax in multiple different states in which it has customers. Sales tax is imposed at both the state and local levels, and in some states (including, for example, New York) extends beyond goods to SaaS services. Depending on the nature of the business, still more taxes may apply.

To avoid penalties and unnecessary costs, we consistently recommend to non-US emerging companies that they work with a startup-friendly US tax accounting firm to ensure they correctly set up US tax compliance and establish appropriate arms-length arrangements between the parent company (“topco”) and subsidiary. This does not need to be excessively expensive when handled by a tax accounting firm motivated to work with early-stage companies on a low fixed-fee or discounted basis.

In particular, non-US entrepreneurs should get tax advice before setting up in, or “flipping” into, a US topco. Establishing in the US through a US topco – rather than a US subsidiary – potentially subjects global corporate profits to US tax. Not only is managing US international tax compliance beyond the internal capabilities of most non-US startups, but corporate income tax rates in the United States are among the world’s highest. Combined federal and state rates of 40% are typical, compared with 20% (soon declining to 17%) in the UK and 12.5% in Ireland. Accordingly, subjecting global revenues to the US tax system may not make sense.

Further, because moving either a company or its intangible assets such as IP out of the US typically will result in significant US tax consequences; we often encounter early-stage companies experiencing “buyer’s remorse” after establishing a US topco when it made little long-term sense for their business.

As a result, although we are US-qualified lawyers, we often recommend that non- US entrepreneurs seriously consider setting up through a UK or Irish topco and enter the US market through a Delaware subsidiary. The UK and Irish tax rates are lower, compliance is easier, and treatment of non-local source income is more favourable.

Also, a non-US topco operating a successful US business through a US subsidiary may be a more attractive acquisition target to US multinationals seeking to put to good use their offshore “trapped cash” profits.

Finally, it is very important to understand the interaction between the tax systems of your home country and the US, as it affects the company and its founders, shareholders and employees. This is influenced by a variety of factors, including the home country’s domestic tax legislation, US domestic tax legislation, and the home country’s tax treaties with the US.

The US is a highly regulated environment for businesses, often with regulations at the federal, state and local level. Non-US companies entering the US market need to understand what applies and how to comply, especially in heavily-regulated industries such as financial services and healthcare.

To provide just one mundane example, every non-US person establishing a Delaware corporation or other US business must file a foreign investment report with the US Department of Commerce within 45 days of setting up the company.

An exemption should be available if the investment is under $3 million, but an application for exemption needs to be filed. The mechanics of this aren’t difficult and can be handled online, but the form is confusing and we often find companies request assistance to complete it correctly.

To be sure, compliance does not necessarily need to be expensive; many compliance obligations are addressed as part of discounted startup packages offered by tax accounting firms, law firms and other advisors. But it pays to understand upfront what those US compliance obligations actually are.

The US is a high-risk environment from a liability standpoint. The US litigation system is expensive, and in contrast to many other countries, in the US each party to a lawsuit bears its own costs (even if it wins). Consequently, commercial counterparties, discharged employees and others may use the threat or initiation of US litigation as leverage to negotiate a business settlement.

Use of a US topco subjects a company’s global business – not just its US business – to these risks. However, even non-US companies entering the US market through a Delaware subsidiary need to respect the subsidiary’s corporate formalities (e.g., board meetings and shareholder meetings) to reduce the risk that a US litigation plaintiff can successfully “pierce the corporate veil” and subject the non-US topco to claims against the US subsidiary. This corporate housekeeping should start from the very beginning – mere incorporation of the subsidiary is not enough.

To be absolutely clear: the benefits of establishing US operations and having access to US financial systems and commercial markets usually far outweigh these risks. However, the US liability landscape rewards those that take appropriate precautions. In particular, non-US emerging companies conducting business in the US should:

• Procure appropriate US insurance coverage
• Pay attention to the terms of the US contracts they sign
• Establish controls to comply with their contractual undertakings

Stripe’s efforts to streamline the US establishment process and remove some of the historical obstacles to US expansion are very welcome. But, companies and entrepreneurs embracing for the first time the opportunities of the US market also should ensure they understand and proactively address the responsibilities and challenges of that market.

© 2016 Fried, Frank, Harris, Shriver & Jacobson LLP – a member of the EACCNY