Legal, Tax, and Accounting August 26, 2020

First tax year with Stripe Atlas

Jama @jmstfv

Background

I incorporated a C Corp in the State of Delaware via Stripe Atlas in February 2019. It was my first time dealing with the tax system in the US, as I’ve never been or operated a business there.

Below is an account of how I struggled dealt with my first tax season.

All usual disclaimers apply.

Why a C-Corp instead of an LLC?

A single-member LLC (regarded as a pass-through entity by default) complicates tax situation for nonresident aliens - a term-of-art for non-US citizens & residents (which is me).

While C Corps are more complex to run, their tax treatment is relatively straightforward: they’re only taxed on their profits. If you’re paying yourself a salary, you can expense that amount, which will lower your taxable income (assuming you’re not a US taxpayer. Otherwise, it gets complicated, fast).

If you’re a US citizen or a resident, LLC is more apt if you want to bootstrap your business.

At the time of writing, Stripe has restricted LLCs to US founders only. Presumably, some folks have shot themselves in feet too much that they decided to pull the plug.

Registered agent

Companies formed in the State of Delaware are required to keep a registered agent in the state. Think of it as an address state and federal agencies use to get ahold of you.

Somewhere around mid-January, you will receive an email from Stripe Atlas asking whether you want to renew the registered agent. If you don’t explicitly opt-out, they will automatically renew your registered agent subscription by the end of January.

Unfortunately, the registered agent that comes with Atlas can’t accept general mail (except for bank cards). Some virtual address providers (aka CMRA) can act as your registered agent. That way, you can avoid the $100 fee for the default registered agent that comes with Atlas. To change the registered agent, you will have to complete a “Change of Address” form.

Delaware Franchise Tax

While Delaware doesn’t have a sales tax, they do impose a Franchise Tax on registered businesses.

There are two ways to calculate the Franchise Tax: Authorized Shares Method and Assumed Par Value Capital Method. I won’t get into a nitty-gritty, but suffice it to say that you can use one that minimizes your tax liability.

A lot of folks running C Corps get stupendously high tax estimates amounting to tens or hundreds of thousands of dollars (causing a drama on the Stripe Atlas forum every time). It happens because the State of Delaware uses an Authorized Shares Method that results in higher tax bills. Once you switch to the Assumed Par Value Capital Method, your tax liability will (probably) drop to $450.

You don’t need an accountant to file an annual report, although the user interface is horrendous, to put it mildly.

Pro-tip: One thing that I wish I’d known is that you can save on the Franchise Tax by authorizing 5000 shares (or less) instead of 10,000,000 shares, which is the Atlas’ default. That way, your tax due will be $225 ($175 minimum tax + $50 annual report filing fee) instead of $450. LLCs in Delaware pay a flat $300 tax.

Corporate income taxes

You pay corporate income taxes on the profit you make during the tax year. Even if you didn’t earn a single cent from the business, you still have to file a tax report by April 15th (you can ask the IRS to extend the deadline).

Nothing precludes you from filing tax reports yourself. Unless you know what you’re doing, you will probably screw it up (terribly) and waste a lot of time that you otherwise can spend on running your business (tax reporting shouldn’t be that complex, but that’s a topic for another day). Stripe Atlas has partnered with two accounting firms offering tax preparation services at a discount.

Your accountant will ask you some questions and your balance sheet and an income (P&L) statement for the previous financial year, so you will have to take care of the bookkeeping before talking to the accountant.

Because I’m a foreigner owning more than 25% of a US corporation, I have to file Form 5472 as well (in addition to Form 1120). The inaccurate filling or failure to file it usually carries a $25,000 fine. In that light, it’s better to pay an accountant and not worry about it.

Pro-tip: Make sure you have an EFTPS pin code before the tax season. If you're outside of the US, get yourself a mailing address in the US, and ask the IRS to mail you the EFTPS pin code.

Just give me the numbers

  • Registered agent - $100
  • Delaware Franchise Tax (C Corp) - $450
  • Accounting service (discounted) - $250

So with the default Stripe Atlas setup for C Corps, you’re looking at $800 for yearly maintenance at a minimum (without corporate income taxes). If you opt to use a default bank account provided by Atlas (SVB), add $300 on top of that ($25 x 12), unless you maintain an average balance of $25,000 per month.

Pro-tip: If you plan to incorporate towards the end of the year, wait until January. That way, you can skip one tax year and spend time building a business instead of doing a soul-sucking administrative busywork.

I originally published this post on my blog.

  1. 2

    hey @jmstfv, could you expand on why "A single-member LLC (regarded as a pass-through entity by default) complicates tax situation for nonresident aliens"?

    As a non-resident alien looking to incorporate abroad I've been investigating on the topic, and thought it would actually be easier. From what I've read [1][3], foreign-owned-single-member LLCs are taxed only on income classified as FDAP or "Effectively Connected Income" [2].

    [1] https://oandgaccounting.com/foreign-owned-us-llc/7-common-questions-about-foreign-owned-u-s-llcs-answered-by-a-cpa/
    [2] https://www.irs.gov/individuals/international-taxpayers/effectively-connected-income-eci#:~:text=If you are a member,services in the United States.
    [3] https://www.irs.gov/pub/irs-pdf/p519.pdf

    1. 1

      Generally speaking, LLCs are easier to run than C Corps and S Corps. They have fewer formalities, thus offering more flexibility for the owners.

      Single-member LLCs are pass-through entities, which is a fancy way of saying that LLC's income flows to the owner, and is reported on the owner's tax report. You can choose to be taxed as a C Corp, though.

      If you're a US taxpayer, LLC's tax treatment is straightforward. Things get tricky for non-resident aliens. As you alluded, you're only taxed on the FDAP and Effectively Connected Income in the US, but as far as I know, it's a rather involved process to prove that your income doesn't come from the US. Also, you might be personally liable for taxes in the US, which is a whole different can of worms.

      If you want to go down the LLC route, I recommend booking an hour of consultation with an international tax lawyer so that you understand what you're getting yourself into.

      Stripe pointed us to the following resources during the incorporation, so you might find them useful:

      There was a discussion yesterday around my blog post, which you might find useful as well: https://news.ycombinator.com/item?id=24282940

  2. 1

    Hi Jama, amazing insight into this topic!

    A couple of questions, I think you might already dealt with them:

    1. What would be the best way to pay compensation to foreign founders (minimizing taxes), C-level (CEO and CTO)? As far as we know, options are:
    • Salary: potential payroll taxes and medicare that we wouldn’t make use for.
    • C-level additional compensation: is there a limitation?
    • As contractors: Might not be possible to work as a contractor while being founder and C-level, owning 25%+ of shares.
    • Dividends: quite high taxes.
    1. Must file each year: form 1120 (U.S. Corporation Income Tax Return) & 5472 (Information Return of a 25% Foreign-Owned U.S. Corporation). Supposing you have 5 - 10 big transactions at most for the first year, is this something founders could fill out by themselves? Any other form you've been required to fill?

    2. How do you send the forms once these have been filled to the IRS? Does your CPA take care of that?

  3. 1

    fantastic summary. So thankful I did some reading first and opted for the 5000 share option to make franchise tax simpler :)
    Didn't know about the free registered agent option - will have to look into that!

    1. 2

      Didn't know about the free registered agent option - will have to look into that!

      To be clear, you still have to pay for the (virtual) address service - it's that some providers offer it as a feature. But don't worry about it during your first year, as the registered agent's cost is already included in your application fee.

      Also, keep in mind that if you incorporate now, your EIN (Federal Tax ID) might arrive a bit late, because the IRS is currently backlogged. Some folks on the Stripe Atlas forum have been waiting for their EINs for months. The bigger problem is that the bank that comes by default with Atlas (SVB) sets a deadline by which you have to provide your EIN.

      I incorporated during the government shutdown and had the same problems. Fortunately, the bank agreed to extend the deadline for our batch.

  4. 1

    This comment was deleted 5 days ago.

    1. 1

      Why not in Estonia or Singapore?

      At least when I started, the US was the only country I knew of where you could incorporate remotely. With Estonia or Singapore, you had to travel there to open a bank account, which kinda defeats the whole purpose of remote incorporation (opening a bank account is non-trivial for non-residents).

      Also, Stripe wasn't available in Estonia back then.

      What advantage do you have unless you are looking for VC money?

      Access to lots of lawyers/accountants who specialize in Delaware entities, lots of resources online, all legal documents are in English. Also, the USD is the de-facto currency of the web, so you won't have to think about FX charges when exchanging USD to EUR or SGD.

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