Disclaimer: this blog post doesn’t constitute accounting advice. When in doubt, talk to a lawyer/accountant and all that jazz.
For the uninitiated, Stripe Atlas is a service by Stripe (duh!) to remotely incorporate a legal entity in the United States complete with a bank account (and some perks).
I incorporated a C Corp in the State of Delaware using 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.
Taxes must be one of the scariest aspects precluding folks from going into a business. 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 the 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.
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.
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.
Make sure you have an EFTPS pin code before the tax season. However, judging by the number of discussions on the Stripe Atlas forum, a lot of folks outside the US don’t receive that mail. To add an insult to the injury, they don’t give you the pin code over the phone. 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
|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.
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 soul-sucking administrative busywork.
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