How to Set Up & Run a Business in the USA

How to Set Up &Run a Business in the USA

A Step by Step Guide

by Tom Pai, MBA

Ravix Group Inc. 226 Airport Parkway, Suite 400 San Jose, CA 95110

Strategic Guidance, Hands-On Implementation1

Step by Step Guide1. Establish a Legal Entity

2. Get a FEIN – Federal Employee Identification Number

3. Set Up Bank Accounts

4. Hire Your Team

5. Pay Your Employees and Provide Benefits

6. Get Business Insurance

7. Keep Track of Your business Using Correct Accounting

8. Pay Taxes

9. Sell Your Company for $1,000,000,000,000,000,000,000

10. Repeat!


1. Establish a Legal EntityWhat kind? C-Corporation (Inc.)? Limited Liability Company?

C-Corporation:Pros: Allows for complex ownership structures; common stocks & preferred stocks with different rights; easy to establish; C-Corp is a “legal individual” & can provide better protectionCons: Double taxation – dividends distribution are taxable; more complicated administrative rules regarding operation of C-Corp

Limited Liability Company:Pros: Pass through profits & losses to shareholders; simplified administrative rules to operate (LLC = cheaper to maintain)Cons: Complex ownership structure is difficult to establish & manage, ownership rules for foreigners & foreign entities complicated, complex rules & tax situations for owner/managers

California or Delaware?For private company, very little meaningful differences. Some small advantages for founders of Delaware company. Delaware company more expensive to maintain.


1. Establish a Legal Entity (cont.)

The BIG question: Which is a better structure for raising capital?

C-Corporation.

• Complex ownership structure better suited to protect interests of outside investors

• No effect to shareholders until time of sale of shares (no pass through of profits and losses)

• Equity Compensation (i.e. stock options or stock grants) easier to administrate with C-Corp

• Investor familiarity with C-Corp structure a big advantage


2. Get a FEIN – Federal Employee Identification Number

A FEIN is more than an employee tax ID. It is an ID for your company, used for doing everything from opening bank accounts, filing income tax returns, obtaining credit from vendors, paying contractors, as well as establishing payroll for employees.

How to Apply:•Complete and file a for SS-4: http://www.irs.gov/pub/irs-pdf/fss4.pdf

or•Apply online: https://sa.www4.irs.gov/modiein/individual/index.jsp

When to Apply:Immediately upon formation of your legal entity. Ask your lawyer or accounting professional.


http://www.irs.gov/pub/irs-pdf/fss4.pdf

https://sa.www4.irs.gov/modiein/individual/index.jsp

3. Do’s & Don’ts of Bank Account Set Up • Don’t open a simple business account at the local bank branch of

retail bank – this is the wrong type of account.

• Do consider opening an account with a business focused bank that caters to startups, such as:

Silicon Valley Bank Bridge Bank

Square 1 Bank Comerica Bank

• Do ask how and what they can do to help you grow your business.

• Do ask them what they know about your industry and market.


4. Hire Your TeamGET HELP FROM A HUMAN RESOURCES PROFESSIONAL WHEN HIRING

FOR YOUR BUSINESS.

• Know the rules and procedures for seeking employees, interviewing, hiring AND firing. • Understand US laws on discrimination, equal opportunity, work rules, compensation, and benefits.• Numerous compliance issues for workplace and employees. Need to understand and follow the laws!• Stick with “best practice” for hiring, employment agreements, compensation, firing. DON’T try and

figure it out yourself.

If you are moving to the USA and working at a U.S. Entity:

• Need to apply for a social security number: http://www.ssa.gov/pubs/10096.html#a0=1

• Get help to understand USA personal tax system.


http://www.ssa.gov/pubs/10096.html#a0=1

http://www.ssa.gov/pubs/10096.html#a0=1

5. Pay Your Employees & Provide BenefitsPayroll• Do use a qualified payroll service with national capabilities (ADP, PayChex, PayCycle,

Paylocity).• Don’t use a bank’s payroll service or QuickBooks payroll service.

Employee Benefits• Essential: Health Insurance. A must for every company. There are numerous options and

plans to suit every budget and circumstances. Costs for small business health insurance is regulated. All brokers sell the same policies.

• Optional: Retirement. If you hire more senior employees, this becomes highly important.

What is PEO? (TriNet, Insperity, ADP TotalSource)• “Professional Employment Organization;” “employee leasing” • Provides payroll and benefits coverage and administration for simple monthly fee per

employee.• Can be good solutions for small companies with few employees and not expected to increase. • Acceptable for those with transferred foreign employees here on L-1 visa.


6. Get Business InsuranceGeneral Liability & Property• Covers property and acts by employees while working or traveling on

business. Required for most office space leases. This is essential from Day 1.

Product/Service Liability• Provides coverage for claims against your product or service. Cost and

coverage varies by type of business you’re engaged in.

Directors & Officers (“D&O”)• Protection for claims by employees and shareholders against the Directors

and Officers of the company. Usually required by outside investors.

Costs can vary a lot. Make sure you work with a knowledgeable insurance broker.


7. Keep Track of Your Business Using Correct Accounting


HAVE AN ACCOUNTING PROFESSIONAL DO YOUR ACCOUNTING CORRECTLY FROM THE BEGINNING.

USA GAAP (Generally Accepted Accounting Practices) is different than IFRS in terms of:•Reporting format•Consolidation of multiple companies•Treatment of R&D expenses•Revenue and expense recognition methodologies

GAAP Reporting vs. Tax Reporting•Cash vs. Accrual Accounting•Categorize expenses correctly for tax purposes – certain items not 100% tax deductible (e.g. Travel and Entertainment)

8. Pay TaxesFederal & State Income Tax Returns – Filed Annually• Estimated tax payments due quarterly

Other Income Tax Filings• 1099 reporting of payments to independent contractors. – Annual• 3921 Reporting of Stock Options - Annual

Sales Tax (similar to VAT) – Quarterly & Annual filing • Varies by state. CA= 7.5%-9.0% (currently)• General principle is that it is only applicable to physical goods (not services or digital content). This varies

by state.

Payroll Tax• Covered by payroll service

Misc. Taxes • San Francisco Payroll tax. 1.5% if over $250,000 annually.• Use Tax: Sale tax for out of state purchases (including online) that would be subject to sales tax-filed

annually.• Personal property tax on assets of company. ~ 1%


9. Sell Your Company for $1,000,000,000,000,000,000,000

When it comes to selling your business, there are important things you might not know…

Liquidation preferences. • Distribution of proceeds based on terms of investment and may not be equal for

all shareholders.• Important to understand and negotiate at time of investment.

Selling your company to a public company for stock. • Public stock is often subject to restrictions as to when it can be freely sold.

Deal structure and terms means some of what you receive may be treated as Capital Gains and some as “Earned Income.” • Capital Gains tax rate for individuals is 15%.• “Earned income” tax rates that go up to 39%.


10. Repeat!“I’ve missed more than 9,000 shots in my career. I’ve lost almost 300 games.

26 times I’ve been trusted to take the game winning shot and missed. I’ve failed over and over and over again in my life and that is why I succeed.”

- Michael Jordan, Basketball Legend & Entrepreneur


Raising Capital in the USAKey requirement for U.S. investors is Intellectual Property

ownership by U.S. legal entity. The “flip up.”

Different Types of Investors: • Angels: $25,000 - $100,000. Focus is early stage. Proof of concept.• Early Stage Funds (super angels): $50,000 - $2,000,000. Proof of concept to

early revenue.• Venture Capital Funds: $3,000,000 and above. Early revenue to scaling for

growth.• Venture Debt: $2 million and above. Sustained revenue to scaling for

growth. Moderate interest rate plus option to purchase small amount of equity. Availability dependent on quality and source of prior equity investors.

• Bank Debt: Available to those with sustained revenue. Based on accounts receivable, recurring revenue stream, assets.


Equity Compensation for Founders & EmployeesStock Options vs. Restricted Stock Awards (RSA)• Both can be subject to vesting and continued employment• RSA can provide tax advantages to holders

Can be good for founders and early employees when value of stock is very low“Fair Value” of grant is compensation to employee and taxableNot practical for later stage of company when stock value has risen

• Stock option rules complex from tax perspectiveMust be price at “fair value” to avoid taxable gain at time of grantISO vs. non-ISO (NSO) rules and taxation are complicated

How to establish “fair value” for company stock• Legally must be set by Board of Directors• Most companies get a 409a valuation to set “fair value”

What is an 83(b) election?• Form sent to IRS within 30 days of receipt or purchase of stock to declare “value” of shares for

tax purposes. Has complex effect on each person’s tax situation.


Strategic Guidance, Hands-On Implementation

Ravix Group provides seasoned consulting expertise to outsource the finance/accounting and

human resources functions for early-stage and middle market companies.


Background• Principals have over 25 years of experience; Controllers,

Accountants and HR Managers have an average of 10-15 years of experience.

• 160 active clients; over 600 clients since inception in 2000.

• Serves primarily technology companies, venture capital firms, nonprofit entities and consulting/services businesses located in Silicon Valley.

Tom Pai - PrincipalOver 25 years of financial and operations experience in technology, media, and consumer products companies ranging in size from start-up to Fortune 100 global enterprises.

Expertise• Strategic and operational planning

• Venture capital financing• Mergers and acquisitions • Corporate restructuring

• Chapter 11 reorganization

Prior to joining Ravix, Tom was the CFO and COO for several venture backed companies in online media, publishing and high technology. He was also the co-founder and principal in DART Partners, an investment firm specializing in underperforming mid-sized companies, and was a senior associate with Bank of America's venture capital group. Tom received his M.B.A. from Carnegie Mellon University and his B.S. in Computer Engineering from University of California, Santa Barbara.

Notable Clients



How We HelpStrategic Advice and Counsel• Senior consultants partner with the CEO in CFO or VP-Human Resources

capacity:* Strategic planning * Operations* Equity * Compensation* M&A

Tactical Execution• Provide Controllers, Accountants, HR Generalist, as needed to do:

* Monthly Close * On-Boarding of Staff* Cash Management * Financial Reporting• Audits

• Setup, implementation and maintenance of accounting & HR systems.


Why Outsourcing To RavixMakes Sense“In a society of knowledge worker specialists, organizations will focus on

the work their specialists do best. They will contract out (outsource) the rest.”

-The Post-Capitalist Society, Peter F. Drucker

• Receive expert advice and services at optimal cost.• Have an objective and unbiased professional handle sensitive

matters.• The CEO is free to focus on the core business.• Ravix professionals receive ongoing training and are held to strict

standards.• Clients have unique access to proprietary database for information

on industry trends and management tools. • Ravix has an established reputation with venture capitalists as a

trusted resource.


Ravix Value Proposition

Knowledge database of shared information & tools

Ability to leverage established vendor relationships

+

+

=Time & money savings for your company

Experienced professionals in 2 key areas of G&A:Finance & Human Resources


Finance Strategic & operations planning,

budgeting & analysis Oversight of fundraising & due

diligence process Cash flow forecasting Setup books & records Monthly close & financial reporting Foreign currency translation &

reconsolidations Debt financing & asset lease

relationships Stock administration &

capitalization tables Contracts tracking & admin Risk management

Board participation & expectations managementAudit & bank relationsAnnual audit preparationSystems implementationRevenue recognitions & commission plansCost accounting & inventory controlPolicies & proceduresMergers & acquisitionsFAS 109 & FIN 48 tax accounting & footnote preparationFAS 124r valuations


Human Resources Recruiting Offer letters & employee file setup Immigration/visas Payroll setup & processing Benefit plans 401(K) administration Audit & assessments Employee handbook Total compensation planning (cash

& equity) Stock option planning &

administration

HR policies & procedures development

Labor law compliance Employee reviews; performance

management programs Employee relations & negotiations RIF’s, terminations & exit interviews Workers’ compensation Organization development Training & development International comp/benefits Cobra administration


Stock Administration Reconciliation and clean-up of

historical capitalization records Issuance of option grant notices upon

approval by the Board Provide employees with exercisable

option calculations Issue stock option notices upon

employee termination Handle share repurchases upon

termination (if early exercise) Track authorized plan shares and

shares available for grant Budget share option requirements

base on anticipated hires Preparation for FAS 123r & warrant

issues

Track stock option grants, exercises and cancellations in Ravix Group’s proprietary capitalization tracking system

Interface with stock transfer agent (attorneys) to process option exercises & repurchases

Issuance of annual ISO Information Statement as required by IRS code

Capitalization table updates and reconciliation with stock transfer agent to ensure up to date records in the event of a financing or M&A transaction

Provide supporting data for annual audit


Vendor Relationships• Banks• Audit & tax firms• Attorneys – General &

Immigration• Leasing & debt sources• Benefits insurance brokers• Recruiters• Furniture & telephone

vendors

• Commercial insurance brokers

• Architects• Real Estate brokers• Building contractors• IT vendors• Payroll services• Workstation installers• Moving/relocation

vendors


Industry Experience•Saas/Cloud based services•Non-profit•Medical Devices•Biotechnology & Life Sciences•Internet•Services/Consulting•Mobile Apps

•Consumer Goods & Devices•Venture Capital•Software•Green Tech•Hardware•Communications & Networking•Semiconductor


Pre-Funded Companies

As part of our marketing process wework with pre-funded companies to:

• Assist in business plan modeling and preparation.

• Introduction to potential investors through bank, legal and CPA relationships.


Conclusion

Clients are looking for:• Strategic guidance and hands-on implementation by experienced

experts at optimal cost.• G&A infrastructure to prepare for growth while staying focused on

building their business.

Ravix Group provides:• The knowledge and service to cost-effectively manage all G&A

functions, allowing the Client to focus on the core areas of their business.

Contact Information


Ravix Group Inc.226 Airport Parkway, Suite 400

San Jose, CA 95110Telephone: (408) 216-0656

Fax: (408) 982-5446Email: [email protected]

Website: www.ravixgroup.com

Tom Pai, MBAEmail: [email protected]

Mobile: (415) 710-7050Skype: tomcp314

Follow us on Twitter! @RavixGroup

http://www.ravixgroup.com/

How to Set Up & Run a Business in the USA

Self Improvement

complex ownership

tom pai

tax purposes

strategic

sustained

early revenue

stock options

226 airport