Since I first wrote about incorporating in the U.S. from Pakistan and a follow-up about Applying for EIN, I have received few questions on incorporation and taxes. In this post, I am curating the frequently asked questions that I have received from startups in Pakistan.
For simplicity sake, I am dividing up Incorporation and Taxes.
Q1. What legal entity should I incorporate? LLC or C-Corp.
Ans. LLCs are used by sole proprietors (mom and pop shops) to keep business assets separate from personal assets. LLCs can’t have investors because it is a flow through entity — income (loss) flows-through to the member (owner).
C-Corporations can have investors and issue shares. If you are planning to raise money in future, give equity to co-founder/employees then C-Corporation is the way to go.
Q2. What happens after incorporation? Do I need a license/permission to operate?
Ans. After incorporation, you are in business. You can open up a bank account under the corporate name and get into legally binding contracts. No license is needed unless you are doing something that is regulated such as money transfer etc.
Q3. Do I need a lawyer to incorporate?
Ans. You don’t need a lawyer unless you have already raised money, have cap tables, need to distribute equity etc.
Q. When incorporating as C-Corp, how many shares should I issue?
Ans. 10,000,000 is recommended and is a common practice in the valley. Authorize 10 million shares, issue 9 million to yourself, keep the rest for employees.
Q. What should I set as the ‘par value’ of the shares?
Q. What should I set as the fiscal year-end?
Ans. By default, all corporations are a calendar year, unless you specifically select a fiscal year.
- Calendar year = January 1, 20xx to December 31, 20xx.
- Fiscal year = April 1, 20xx to March 31, 20xx
Q. What taxes do Delaware startups pay?
A. All corporations incorporated in Delaware file an Annual Report and pay a franchise tax, even loss companies. The Annual Report filing fee is $50.00. The minimum tax is $175.00, for corporations using the Authorized Shares method and $350.00 for corporations using the Assumed Par Value Capital Method.
Besides Delaware, if you have taxable income, you will pay Federal taxes at 35% tax rate. If you have a taxable loss, there are no minimum taxes.
Q. What are the due dates?
Ans. Delaware annual report and minimum franchise tax due date is March 1. Federal income tax return and tax is due March 15 (15th day of the 3rd month after the close of the tax year). You can apply for a 6-month extension to file but make sure to pay the taxes by the 15th.
Q: Will the startup owners/founders owe personal taxes to Government of Pakistan or the United States?
Ans. I have no idea how taxation works in Pakistan. In the U.S., you will need to file a tax return for yourself (owner) and pay taxes on personal income. That’s only if you get paid dividends from the corporation or take a salary.
If the answer to your question is not listed above, please get in touch.
Legal Disclaimer: I am not a lawyer and the above information is not legal advice and should not be used as such. I am not associated with any of the above-mentioned services. By suggesting the services, I am providing a resource, not an endorsement.