This guide is written in consultation with Upekkha's legal team. It is a general guide and insight written to get a layperson to understand the process. Please consult your lawyer/CA/CS/CPA to verify your structure, application forms and others before processing your application for overseas entity incorporation.
A ship is built to sail, and startups are built to scale, not just to play it safely. According to a 2018 KPMG India and Google study, by 2022, a USD 39 billion opportunity will be unlocked for Indian companies (including B2B SaaS) if they go global. This is likely to keep expanding in the years to come.
However, you must pivot mentally before facing the market you want to sell in. The decision to shift from India to the USA is necessary if you are a B2B SaaS founder wanting to scale and have global aspirations. Legal and compliance issues are one of the most challenging aspects you will face. Let’s help you out by answering some of the toughest questions related to it.
The United States is the world’s largest and most lucrative market for B2B SaaS companies. Indian SaaS companies have been increasingly targeting the US market in recent years and have successfully captured a significant share of it. However, expanding into the US market can be challenging, especially from a legal standpoint. A 2018 KPMG India and Google study found that Indian companies, including B2B SaaS companies, could unlock a USD 39 billion opportunity by going global by 2022. This opportunity is likely to continue to grow in the years to come.
What Are the Benefits and Processes of Setting up a US Entity?
Incorporating a US entity early on simplifies running your business and offers several advantages. Some of these advantages are enumerated below:
Optimised customer-facing teams: With a US entity, you can set up customer-facing teams in the USA, which cater to global clients more effectively. This team is equipped with knowledge and experience in handling nuances related to culture and language.
Multi-currency payment gateways: Invoicing and payment collection from your global customers becomes more seamless as you can set up multi-currency payment gateways.
Opportunity to network and connect with global investors: Connecting, networking, and ultimately raising funds from US and other global investors becomes easier. Having a US entity increases the chance of attracting more investment opportunities.
Compliance with foreign investors: Compliance requirements when dealing with foreign investors are more straightforward with a US entity in place.
Strategic business partnerships: Your ability to build partnerships and explore potential partnership opportunities for your business gets enhanced when you have a US entity.
To set up a US entity, entrepreneurs can use a platform that helps start-ups form C-Corps or LLCs in Delaware, obtain a US Employer Identification Number (EIN) for tax purposes, and open a US business bank account – all remotely for a one-time fee of approx $500.
What Are the Entity Structuring Options?
Once you have decided to have a US entity, you must consider the best structure for your business:
US entity with India subsidiary: This structure involves setting up the US entity as the parent company and having the India entity as a wholly-owned subsidiary. This is a highly recommended route for early-stage start-ups.
India entity with US subsidiary: In this model, the Indian entity remains the parent company, with the US entity acting as the wholly-owned subsidiary. You can consider this structure for later-stage start-ups with specific requirements.
Operating solely as a US entity: While some start-ups operate solely as a US entity, this isn’t recommended due to potential compliance and legal issues in India.
How to incorporate as a C-Corp in Delaware?
To select the most appropriate business entity, consider these factors:
Protecting personal assets: A C-Corp provides protection for your personal assets and separates them from business liabilities.
Tax strategies: Consult a lawyer to consider all available tax benefits and avoid double taxation issues.
Fundraising and governance: C-Corps are preferred for fundraising from external investors and maintaining a regulated governance structure.
Tax implications differ for C-Corps and LLCs. C-Corps are taxed as separate entities, while LLCs are typically taxed at the individual level. Always consult a tax advisor before deciding the best fit for your start-up.
How Do You Handle Transfer Pricing and Reseller Agreements?
A transfer pricing arrangement is necessary when a US entity needs to transfer funds to an Indian entity for its expenses. This arrangement follows a revenue-plus-cost model with a markup (usually 17% – 25%) for SaaS businesses. The Indian entity can use the received funds for business expansion. As a founder, you can use a reseller arrangement where the Indian entity acts as a reseller, selling products to Indian customers on behalf of the US entity. The pricing model can vary depending on the specific agreement.
What to Go About the Transfer of IP (Intellectual Property)?
Your startup’s US entity should legally own the IP for startups with two IPs (one for the US software and another for India). This is possible when the US entity pays the Indian entity, as it has developed the IP. Payment is made based on a valuation report provided by a Chartered Accountant.
How Do You Address ESOPs (Employee Stock Ownership Plans) Issues?
ESOPs for your Indian employees will be granted by the Indian entity, while your US employees will receive ESOPs from the US entity. However, Indian personnel (not employees) can receive stocks in the US entity through consultancy agreements.
What Are the Visa Compliances?
Getting a US visa, especially an L1 Visa, can be more challenging in a parallel structure. As a founder, you should be prepared for potential complexities in visa processing.
How Do You Comply With RBI and FEMA regulations?
It is essential to comply with RBI and FEMA regulations while making transactions between Indian and US entities. A well-versed Chartered Accountant who has previously worked with cross-border entities can assist in this process, ensuring adherence to regulations.
If your product-based tech startup is registered in India, can it have customers in the US without registering my company in the US? What legal challenges are associated with this scenario?
In many cases, your Indian B2B SaaS startup can have customers in the US without establishing a physical presence or registering a separate entity in the US. This arrangement is often called “cross-border” or “international” business. However, there are several legal considerations and potential challenges you should be aware of:
- Operating in the US market might subject your company to certain US tax obligations. You may need to consider sales tax, income tax, and withholding tax on payments received from US customers.
- Ensuring your IP (Intellectual Property) rights are protected in the US is essential. This could involve registering trademarks, copyrights, and patents in the US to safeguard your product and brand.
- If your SaaS product involves collecting and processing personal data from US customers, you’ll need to comply with US data protection and privacy regulations, such as the California Consumer Privacy Act (CCPA) and potentially other federal laws.
- Having lucid and comprehensive terms of service or user agreements is crucial when dealing with customers in different jurisdictions. These agreements should address issues like liability, dispute resolution, and governing law.
- If your SaaS product involves technology that is subject to export controls or sanctions, you may need to obtain licenses or permissions before offering your product to US customers.
- If a legal dispute arises with a US customer, you must consider which jurisdiction’s laws will apply and where any potential legal action would occur.
Depending on the nature of your SaaS product, you might need to comply with specific US industry regulations or standards.
How Do You Sign Mutual NDAs and Other Legal Agreements Sent by Prospects and Partners?
Carefully review the document, ensuring terms align with your startup’s interests. Seek legal counsel and get economical lawyers on board where you can negotiate prices. Ideally, lawyers should be paid higher fees when you raise additional funds, i.e. during your seed and series investment stage and not at the incorporation/pre-seed stage.
If agreeable, sign and date the document. Consider negotiation for terms if necessary. Retain a copy for reference. For efficiency, utilize e-signature platforms or physical signatures, as appropriate. Maintain organized records of signed agreements for future reference and compliance. Always prioritize safeguarding your startup’s IP and interests while fostering collaborative relationships.
When Is the Right Time to Tire an Accounting Firm in the US? What are the Compliances to be Aware of Once Incorporation is Done?
Engage a US accounting firm when your Indian B2B SaaS startup starts engaging with US clients or establishes a substantial presence. Starting early ensures proper financial structure. Key post-incorporation compliances include filing federal and state taxes, adhering to other tax requirements, getting an EIN( Employer Identification Number), and understanding transfer pricing regulations if applicable. Ensuring regular financial audits, tax filings, and accurate record-keeping is also crucial. Compliance with GAAP (Generally Accepted Accounting Principles) and keeping track of tax deadlines are essential to avoid penalties. Collaborate closely with your accounting firm to ensure smooth financial operations and adherence to US regulations.
How can Startups Effectively Navigate the Legal Challenges of Immigration and Visas During the Transition?
Startups can navigate immigration challenges by first understanding the specific visa options available in the target country, such as the US H-1B visa. They should gather required documentation, demonstrate the startup’s viability, and ensure compliance with local laws. Consulting immigration experts helps streamline the process. Early planning, maintaining transparent communication with employees, and adapting to evolving regulations are key to a successful transition while mitigating legal complexities.
Conclusion: Legal Considerations for Shifting From India to the USA
Shifting from India to the USA entails several legal considerations that founders must address for successful operations. It’s important to engage with legal professionals who have expertise in both Indian and US business and technology law. Consultation with lawyers and tax advisors is essential to understand specific legal requirements and regulatory changes. By carefully navigating these legal aspects, you can make informed decisions, enhance shareholder value, and set your start-ups on a path to global success. The laws and regulations are susceptible to change, and every situation is unique. So, always get expert advice from qualified legal professionals to ensure you make informed decisions for your startup’s operations.
