Why is Stripe Atlas Bad for Foreigners?
Taxes, US investors, and compliance headaches – if you don’t want these, avoid Delaware and Stripe Atlas. You can get a company registered, a bank account, and a merchant account easily in Hong Kong, Singapore, or lots of other places, and we’d be happy to help at Incorporations.IO.
Stripe Atlas May Not Be Right For You
Stripe’s recent announcement that it is now in the corporate services business has people calling it a “game changer.” Really? A firm that helps you set up a company, bank account, and merchant account? Hundreds of other companies have been doing this for years.
The only difference is that Stripe has agreed a group of people take on the risk of doing it for foreigners who won’t physically visit a US bank. Granted, Stripe is fairly legendary for reducing the pain of payment processing, through aggregation and clean API’s (kudos for that!). And the company’s new “business in a box” offering resonates with people because setting up a company is confusing, annoying, and sometimes expensive (at least, for the first time). But that’s all starting to change – the process is becoming more transparent and easier. And when you compare company entity types worldwide, it’s clear that a Delaware C-corp with California banking is for one type of company only…
Only for Silicon Valley Startups
The hype, branding and messaging for Stripe’s new product is a bit off base, particularly its marketing and selling of Delaware as a be-all and end-all. This whole process is for Silicon Valley, with little applicability to anything outside the echo chamber there. This isn’t for hustlers in Shenzhen, bootstrappers in Bali, hipsters in Hyderabad, call centers in Cebu, or makers in Medellin, and unless you think you are the next Zuckerberg, with an ambition to “go public,” it’s probably not for you.
A Delaware C-corp with California banking is specifically for founders who want to raise VC money. Here is specifically why a Delaware company and Stripe Atlas isn’t for you.
US Tax Compliance
If you are a non-US person and you sign up for Stripe Atlas, welcome to tax hell. The US tax system is one of the most complex and difficult to understand in the world. Unsuspecting entrepreneurs from around the world who sign up for this offering, having been sold on the “ease of setup” of a Delaware corporation with California banking, would find themselves entangled in the IRS tax web, having created a significant tax liability, even if they have never had a single employee or customer in the US, or written a single line of code there!
If you are a foreigner who’s thinking of incorporating in Delaware, try first asking any expat American living in your country what he thinks about the US tax system. Go ahead, ask them! Ask any American who has been living outside the US for more than one year. You’ll hear tales of trials and tribulations involving FATCA, FBARS, reporting bank accounts, 5471’s for companies that have zero relation to the US tax system. American expats routinely pay taxes to a country that they don’t live in and that provides them with little to no services, and this is something you will face if you choose to incorporate in Delaware.
Besides the high rate of corporate taxation (one of the highest of all developed economies), the IRS tax code has huge penalties for noncompliance. For instance, if you intentionally disregard filing a bank reporting form (the FBAR), you’ll face serious penalties, including jail time, a $50,000 fine, and the cancellation of your passport. Really. The IRS has the power to cancel your passport because of serious delinquent tax debt.
If you are a foreigner, why choose to put yourself in a tax predicament that ends up giving away more than 35 percent of your bottom line and putting you personally at risk if you screw up? The US tax code is 2,600 pages long. It’s 2½ times the length of Stephen King’s It, except the words “scary clown” are replaced with “scary and complicated accounting methods.”
Withholding tax is a bit of a “hidden tax.” It means that if you live in a country without a tax treaty with the US, you can face the serious risk of double taxation. You’ll face a 30 percent withholding tax on all payments sent outside the US, unless they are sent to a US person, or a country with a tax treaty with the US. You’ll also have to collect forms W-8 and W-8BEN for every person or company that you make a payment to. But if that person is a US person, you’ll have to file a different form. Simply put, there are lots and lots of forms to keep track of.
This isn’t tax advice, and I highly recommend that you get professional tax advice before setting up a company in the US. Note also that Stripe Atlas’ setup explicitly does not include any form of tax advice.
Arm’s length and transfer pricing rules
Regardless of whether there is a tax treaty or not, if you are the owner or related party of any of these entities, you’ll have to abide by transfer pricing protocols. This is a very complex tax concept to explain, but in short, layman’s terms, if you, for example, own two companies, Delaware Newco Inc. and India Oldco Pty. Ltd, you will need to be very, very careful with the way that you send money between the companies, as you are trading “within arm’s length.” Ideally, you should have a proper set of transfer protocols drafted by a professional and certified accountant. This is expensive, complicated, and does not help early-stage companies move the bottom line.
Selling the “Dream” of US Investors
Mass media has made fundraising look like a trendy fad. It almost looks like it’s easy to raise a few hundred million dollars at a billion-dollar valuation, given the number of startups that have raised money at ludicrous valuations they really can’t ever grow into. What’s not covered as often by the media are the investor downside protections, the liquidation preferences, and the rate of failure.
It’s arguable that many foreign-based or non-US founders are being sold on Stripe Atlas as a chance to get US funding. But selling the “dream” of US investors is a bit disingenuous. Y Combinator, the most successful accelerator, has hopped onto the bandwagon and promoted Stripe Atlas (which makes sense, as it is an investor), dangling the proverbial worm: you’ll get into YC if you have a Delaware C-corp set up by Stripe Atlas and friends!
Even if you do get into Y Combinator, the odds that your startup will become a unicorn – a billion-dollar company – are slim to none. We did some quick math to see how slim your chances are:
Google “YC acceptance rates” and you’ll get numbers from 2014:
- Acceptance rate of the current batch: <3%
- Number of YC companies worth more than $1 billion: 3
- Number of companies funded by YC so far: 716
According to these metrics, you have a smaller than 3 percent chance of getting into Y Combinator. If you do get in, your chances of someday reaching a billion-dollar valuation are smaller than half a percent. Put differently, every 995 times you try, you’ll succeed five times. As a foreign founder of a company who’s fighting visa issues, finding housing in San Francisco, and putting food on your plate every night, your chances are undoubtedly lower.
Of all the companies funded by Y Combinator, just three are unicorns. [Footnote] This gives YC and its limited partners’ massive returns. Also, they are a VC, and VC’s can afford to have eight or nine out of 10 investments fail (the earlier the VC, the more losses they can have). [/footnote] The chances of you applying to YC, getting in, and finding follow-on funding in successive rounds to grow a billion-dollar company are likely lower than 0.4 percent, if we use past performance of YC startups as an indicator of future success of your company.
Digital Nomads and Bootstrappers Beware
Incorporation and taxation is a tricky subject for “permanent travelers” and those on the move as digital nomads. Increasingly, this is the route chosen by bootstrappers to start a company. Move to a low-tax place like Thailand, Vietnam or Bali, and build a company in a fresh environment, without the distractions, overheads or high burn of the Western world. Extend your runway, live on your own terms, and focus on what really matters: building something that customers want and are willing to pay for, not chasing coffee meetings and term sheets.
If you are a founder of a company, you should have a legal entity, and you should find the jurisdiction that treats you best, but realize that you have options. The “Delaware corporation, California banking, VC money, IPO or bust” route is not right for everyone.
Digital nomads, especially, as well as US expats can save time, money and energy by picking a much more suitable legal entity. Look into Hong Kong, Singapore, Nevis, or BVI, for starters. Or read this article: Where should a digital nomad incorporate?
If you want to go the US route, an LLC is typically a much better structure for a US company, because it avoids double taxation, as you can choose to classify an LLC in one of four ways: S-corp, C-corp, disregarded entity, or partnership. This is much more flexible than a C-corp, which is typically taxed as a corporation or an S-corporation (which is unavailable to foreigners).
If you want to go international, there are countless other jurisdictions into which you can incorporate, and many of them have lower tax rates than in the US.
Why Stripe Atlas Might Not Work
Here are eight reasons that Stripe Atlas may not roll out as seamlessly as planned.
1. Illegal and violation of KYC laws
It’s quite likely that Stripe is in violation of Know-Your-Customer laws, which mandate that an individual opening a bank account must physically appear in front of a banker in a branch office. How did Stripe get around this? We don’t know.
2. No vertical integration
Is this is a joint venture between the five different companies? Will Orrick be the registered agent? Or will PWC? Stripe’s core business model is aggregation. Yes, it makes sense that it would set up new companies as a loss leader, but is Orrick going to be able to mass-incorporate LLC’s, obtain US addresses, EIN’s, and keep company founders up to date with meeting minutes and additional corporate governance required in Delaware, for only $500 and $125 a year?
We’ll need to wait and see how long it takes Atlas’ parties to coordinate a brand new service (that is frankly quite high-risk and requires a degree of due diligence and a human touch during the know-your-customer process). It’s unlikely that Silicon Valley Bank will want or have the appetite for the tremendous influx, and pre-vetted accelerated startups will probably have first dibs.
3. Tax advice from PWC?
The last time I checked, Big Four accounting firms don’t dole out tax advice to aspiring entrepreneurs in various developing countries with the dream of building the next Airbnb. Most likely, Stripe Atlas is looking to lock in a loss leader and upsell companies on expensive tax advice or accounting services. Ask anyone, the Big Four aren’t cheap – even they will tell you that! Many a startup have given up precious equity for accounting or legal services, or been overcharged in an area they knew nothing about and wanted to get away from (legal and tax paperwork).
4. Fake ID’s and falsified KYC
How difficult is it to fake an identification process? It depends. In the US, companies like Experian provide information on American public record and credit files to seamlessly identify people online through knowledge-based authentication (KBA). If you’ve ever opened a US bank account or applied for a credit card as an American, you would have gone through this process and answered questions about the model of your first car, and your Dad’s middle name. Currently, there is no KBA certification for emerging markets, and in most countries, it’s not possible to do this kind of credit check.
As an aside: since we’ve been doing remote account opening and international incorporation for years, we’ve developed and tested technology that can identify anyone remotely, translate and certify documents, and finally record them on the blockchain. Our operating B2B brand for this is KYC-Chain.
6. Lawsuit land
A lot of foreigners don’t realize how many lawsuits take place in the US. They are rampant, and you can be sued for almost anything. Intellectual property and patent trolls also have a much easier time suing you once they can establish jurisdiction and venue in US court systems. This is a point that most startups miss: if you get sued, it’s often a death toll.
The real reason that investors like Delaware? In most business-friendly states, the actors of a company are indemnified, except in cases of negligence or fraud. In Delaware, officers, directors, employees, and agents are not statutorily indemnified. This means that investors can easily sue a company’s founders for various grievances. Some investors can be very aggressive and can even use a potential lawsuit as a negotiation strategy. And why not? They have more money and resources, and you were the one who made the mistake to form your company in Delaware!
7. Unsolicited legal advice from Stripe
While we include a new bank account when you incorporate through Atlas, you can update your Stripe account to use a different bank account-like your personal account-if you prefer.” 2
Let me just say this straight up: this is awful advice. The suggestion to co-mingle a personal and business account is downright dangerous. It’s a sure-fire way to pierce the “corporate veil” of the legal entity. This means that if (or when) you get sued in the US, you’ll be personally liable for the debts and liabilities created by a court charging order.
Unsolicited Advice to Stripe
The Collison brothers are extremely ambitious and talented entrepreneurs. What they’ve done for payments is nothing short of revolutionary. But this innovation has been largely contained to the US.
I heard John Collison speak about “What plans Stripe has for Asia” at RISE conference in Hong Kong last summer. I remember sitting there thinking, “These are great plans!” But then it occurred to me that although Stripe’s founder was in Hong Kong, its aggregation services were not. In fact, they were actually a few years late.
There have been unheard impassioned pleas from bloggers and even an online petition calling for Stripe to bring its aggregation and payment processing services to Hong Kong.
Why is Stripe farting around with Delaware company setups – a service already provided by hundreds of registered agents – when it should focus on international domination of its core product? This is a product that people have been raving and begging for, but which it is failing to deliver, leaving easily-obtained market share to be scooped up by its competitors Braintree and PayPal.
I like Stripe’s aggregation services and the founders themselves, and I have a lot of respect for them, but so far, their international rollout has been unimpressive, especially when compared with Uber or Airbnb. Granted, Stripe has raised only $350 million (a small amount compared with Uber’s), and it has to deal with a lot more compliance, being a B2B2C company. But we can all agree fundamentally that its business model is to aggregate merchant services and serve them to customers in a developer-friendly API. Why not continue to roll this out country by country?
Stripe has crushed the aggregation model, which for years, had been dominated by PayPal. I see this Delaware push as a workaround after they couldn’t expand quickly enough in emerging markets. Its beta program in Singapore was rolled out at a snail’s pace, and the company still hasn’t made its way to Hong Kong, even as Braintree has. Stripe also has no plans for Southeast Asia, Africa, China, or Japan.
I emailed the Collison brothers a long time ago, offering to help them roll out their services in Southeast Asia when the market was just starting. I’ve been living in the region for over five years, helping companies incorporate and set up bank accounts and payments. I’ve seen firsthand the problem that companies in Thailand used to have when setting up, because there was no aggregator. Newcomer Omise is essentially Thailand’s Stripe, and it is pushing hard to expand into Indonesia.
Stripe doesn’t have the same foothold in the region or internationally that it has in the US because it moved too slow. With Stripe Atlas – a new distraction that ultimately doesn’t hold water, in terms of economics – will the company continue its dominance? Time will tell.
For now, it’s time for you to set up a Hong Kong or Singapore company, banking and merchant account.
Introducing “Atlas” Hong Kong + “Atlas” Singapore
We’ll help you set up a Hong Kong company, with a Hong Kong bank account, Braintree merchant processing, a Hong Kong registered office for one year, and a Hong Kong secretary. We’ll also provide you with a local address and help ensure that you get a debit card (which is hard to obtain in Hong Kong).
Alternatively, if you are looking for a Singapore company setup, we can also help, as we have offices there as well. This setup comes with a local nominee director (if needed), and you can obtain a company, bank account and merchant account setup for a flat rate. Some people don’t need the nominee director, so contact us today for a quote.
If neither of these jurisdictions is right for you, you can look up and compare hundreds of other options for incorporation that we’ve gathered at Incorporations.IO, which is based on objective metrics, or take a short quiz on where to incorporate.