Disclaimer: this blog post doesn’t constitute accounting advice. When in doubt, talk to a lawyer/accountant and all that jazz.
I incorporated a C Corp in the state of Delaware via Stripe Atlas in February 2019. I have never run a business in the United States before, so a lot of things were new to me.
Taxes must be one of the scariest aspects precluding folks from going into a business. Below is an account of how I dealt with the tax season.
All usual disclaimers apply.
Why a C-Corp instead of an LLC?
I have no intention of raising investment and try to minimize complexity as much as I can.
After brief research, I found out that 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.
While C Corp is 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 (note that if you’re residing in the US, you might need to withhold 30% of a salary as a tax, in addition to paying a payroll tax. It gets complicated, fast).
If you’re a US citizen or a resident, LLC is more apt if you plan to bootstrap your business.
If you plan to incorporate towards the end of the year, wait until January. That way, you can skip one tax year.
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. Unfortunately, the registered agent that comes with Atlas can’t accept general mail (except for bank cards).
Somewhere around mid-January, you will receive an email from Stripe asking whether you want to renew the registered agent. If you do nothing, they will charge your card $100 at the end of January.
Some virtual address providers (aka CMRA) can act as your registered agent. That way, you can avoid the $100 fee Stripe Atlas’ for the registered agent. 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 and Assumed Par Value Capital. 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 disproportionately high tax estimates amounting to tens or hundreds of thousands of dollars. It happens because a 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 Delaware 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, 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).
Technically, you can file 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. Stripe Atlas has partnered with two accounting firms offering tax preparation services at a discount.
Your accountant will ask you to fill a questionnaire and provide a 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.
|Delaware Franchise Tax (C Corp)||$450|
|Accounting service (discounted)||$250|
So with the default Stripe Atlas setup, you’re looking at $800 for yearly maintenance at a minimum (without federal taxes). If you opt to use a default bank account provided by Atlas (SVB), add $300 on top of that ($25 x 12).
Some taxes I haven’t mentioned are state taxes (other than Delaware), sales taxes, and EU VAT. I haven’t had to deal with them yet.
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