A French Startup’s Guide to Setting Up in Austin, Texas: Legal Lessons 101 — Part 1 of 3 (visas and choice of entity)
Thanks in large part to French Tech Austin, our initiative through FABCA to support French startups and techies in Austin — as part of France’s national branding campaign, La French Tech — an ecosystem now exists to support French startups in Austin. I include here some of the basic information that French companies need when considering a U.S. presence in Texas. Here follows Part 1 of this 3-part series, each one with a disclaimer. Please know that no lawyer-client relationship exists just because you peruse this article with gratuitous pictures of Paris. The following verbiage is for general informational purposes only and does not constitute legal advice for your situation.
Maybe you are seriously considering Austin, or maybe you’ve already made the decision to set up an office here. You are not alone. Austin has received a lot of attention lately. In April 2018, Austin was named the best city to live in out of all the United States. Forbes just named it the #3 best city in the U.S. in which to start a business. And over the years other accolades have rolled in:
Top city for “small-business vitality”
“Top city for launching a technology startup up”
#2 region in the country for growing companies
If you are a French founder or techie of any kind, you will be in good company if you choose to launch your U.S. operations out of Austin. We have an active ecosystem supporting France-Austin business initiatives and connections, including our French American Business Council of Austin and the hyper tech-focused French Tech Austin. Austin’s appeal is based in large part on its quality of life thanks to its musician past and “Keep Austin Weird” attitude — which Le Monde got just right in its “Le Texas, c’est sensass” article. Add to that the economic benefits and the sheer market size of Texas, and you can see why Austin has been named one of the fastest growing cities in the U.S.— taking the #1 position according to WalletHub for highest growth in 2017.
So put away that brisket breakfast taco and Pacha Latte![1] It’s time to get to work setting up that office in Austin.
DISCLAIMER: No one article can address all the details about market entry. This series of three articles addresses key issues that frequently arise with non-U.S. entrepreneurs expanding into the U.S. This article is for general informational purposes only: it is not legal advice and is not to be relied on as such. Consult an attorney as each individual case must be considered separately based on its own facts and circumstances. Laws and regulations, especially in the immigration area, can change quickly; please consult an immigration professional for the most up-to-date information. Many thanks to my (now former) colleague Brigitte Hocking for her input on the visa section below.
I. THE VISA
You must start thinking about the visa as soon as you start thinking about launching your U.S. operations. You cannot work legally in the U.S. without a visa. This includes doing contract work in the U.S., for a U.S. company, and running those bills through your company in France. Tread carefully in this area. The visa process requires a lot of advance work. In fact, it requires that the business be pretty much ready to go — with a business plan, financing, hiring strategy, and perhaps even clients lined up — with little else to do but secure the visa.[2]
A. The L Visa
If you have a company already in France, or if you have worked for a company in France in a managerial or executive capacity for at least one year and the company wants to expand into the U.S. and launch that operation out of Austin (or anywhere in the U.S.), you may be eligible for an L-1A visa. This visa is reserved for a manager or executive who is opening a U.S. office. That manager or executive would be granted an initial L-1A valid for 1 year in which to oversee the operations and hire the workers in the U.S. It can be renewed, for a total of 7 years, but keep in mind the renewal will be based on the number of employees hired during the first year and the roles of those employees. This new office L-1A visa is first processed through the United States Customs and Immigration Service (USCIS); once it is approved, the L-1A visa stamp is secured at the U.S. Embassy.
For your visa application, you will need to show the office space you have secured, including a floor plan, and the business plan for how the business intends to grow and expand and hire more employees. The business plan must include a personnel table and detailed explanation of the hiring schedule. These requirements mean that many visits to the U.S. may be necessary. Those visits are necessary to find the office space and then make sure that other required details are met, such as for the adequacy of the local office and how it is sufficient to execute on the company’s business plan. Of course, consultants exist who can support this process. Just plan for these expenses in your budget.
Does co-working space work for this office space requirement? It depends. Remember that the requirement is that the company show it has secured sufficient office space to house operations during year one. Whether co-working space is considered sufficient will depend on the type of company and the number of employees that it anticipates hiring. Ideally the office space should be large enough to accommodate all employees that currently work for the company or will be hired by the company during year one of operations. Companies that engage in manufacturing or hold inventory also should obtain warehouse or factory space.
Lastly, be aware that the USCIS has been routinely requesting evidence that the foreign company has transferred its capital contribution to start the U.S. entity’s operations. The investment typically should be consistent with the capital contribution indicated on the business plan.
B. E Visas
These are the treaty-related visas: the E-1 (Treaty Trader) and the E-2 (Treaty Investor). The Treaty Trader or Investor may be an individual or an established company in France.
The E-2 requires a tremendous amount of documentation. This is logical. You are showing your dedication to the venture and that it is a real, viable operating entity. That documentation serves a specific end goal: showing that you will not only hire U.S. employees but also generate a profit and support you and any dependents during your stay in the U.S. You will need a detailed five-year plan for this purpose.
The E-2 requires a significant investment of one’s personal funds, or the French parent company’s funds, into the U.S. This requirement begs the question: What is a significant investment? It depends. Are you investing in or creating a new business, or are you purchasing an existing business? What type of business is it? A restaurant, a bike shop, a software company, a café/bakery? It largely depends on the type of business and whether it reflects a typical and substantial amount for the industry and business type and not just a marginal amount to secure a visa to live in the U.S. The business plan will need to show how the business will be able to realize a profit in, at most, five years.
If you must secure some financing, that is permitted. However, it should be a secured loan, with the collateral being something you own that you have put at risk, such as your home or other property. An unsecured loan is not prohibited per se, but it can lead to a denial as it does not prove one of the requirements that the money being invested be “at risk.” How much financing becomes too much and will get your visa application denied? No firm rules exist that dictate exactly how much financing is permissible. The key element is that the money being invested be “at risk,” and that you have made a serious personal commitment to this venture: this means putting up some personal money.
The fact that the funds and financing must be ready to go, before even starting the visa application, shows how much risk is involved for the visa applicant. A lot of commitment is required to show the business is ready to go, but with no guarantee of success. For this reason, working with an experienced immigration lawyer is critical. He or she will have the experience from past applications for what investment dollars are most likely to ensure a successful result in applying for the E visa. Although purchasing into an existing business may not present that same level of risk, it does present a different risk. The Consular office handling your E-visa application is allowed discretion to determine whether the percentage of financing you have obtained for the investment is permissible.
Although the visa application process may seem daunting, remember that the U.S. is interested in your great business plan because you will be supporting the economy by creating jobs! Your business plan should focus on how this job creation will happen.
II. CREATING THE U.S. ENTITY
This issue is most applicable if you are investing in creating a new business in the U.S. for the E-2 or opening the U.S. office of a (French) parent company — such as under the L-1-A. If you are buying into an existing business, that entity will already be (or should be) operating as a separate legal entity.
A. Choice of Entity: Where and What
Roughly analogous to the S.A., S.A.S., and S.A.R.L., the primary entity types in the U.S. include a corporation and a limited liability company (LLC), with the LLC comparable to the S.A.S., which is typically used for small-or medium-sized companies: it is very flexible in terms of governance and may exist with only one shareholder. A U.S. corporation (or LLC), whether in Texas or Delaware, can be formed with only one person: one person is the sole shareholder as well as the only director and officer(s).[3]
A big difference between French and U.S. corporate law, very generally speaking, is the flexibility afforded owners of a U.S. company to make their own rules (within reason). In other words, not many terms or rules are “hard-wired” into any of these U.S. entity types. For example, the Delaware statutes allow considerable discretion to the corporation’s board, including a significant amount of deference for business decisions, absent extenuating circumstances, to the board’s “business judgment.”[4]
State law (which varies from state to state), not federal law, governs the formation of a corporate entity. This means that the state law under which you choose to form your entity is not necessarily the law that will govern most of your company’s daily operations (relationships with your employees, vendors, local regulatory authorities, etc.). You may locate your company — your office and employees — anywhere in the U.S., regardless of which state law you choose to govern the formation of the entity. Thus, even though you are residing in Austin, Texas and have your office at Capital Factory, WeWork, Galvanize, or Impact Hub — to name just a few co-working spaces — or in a revamped warehouse space in Austin’s “east side,” you may have chosen to form your company under Delaware or even Nevada law. There are pros and cons to this choice of operating in Texas but forming the entity under another state’s law. Consultation with a tax advisor is always recommended as the choice of entity question is closely tied to how the company is taxed, which in turn affects how the individual owners account for income from the entity. To take advantage of international tax treaties if the U.S. entity is a subsidiary of a French parent, for example, you may need to be structured differently than what a Texas lawyer might typically advise for a U.S.-based client. Tax advice and the tax issues associated with entity formation issues are far beyond the scope of this article.
B. FAQs About Forming in Delaware
Having formed both Texas and Delaware LLCs and corporations for French clients as well as local startups, a pattern emerges with similar questions concerns at the outset of any engagement. Here are the most typical questions and (general) answers.
Everyone tells me I need to be a “Delaware C Corp.”
It is true that more than 60% of the U.S. Fortune 500 companies are registered in Delaware, so it’s certainly the most well-known structure in the U.S. It may add a certain prestige on this basis alone.
But as your parents might say: Who is this everyone? Are you everyone? Only you, your legal advisor, and accountant can decide what is best for your situation, including understanding the tax consequences of any acquisition of your entity and how franchise taxes will be calculated.
Moreover: What is your exit strategy? What classes of stock are important to your business strategy and fundraising? Are you already thinking about a high-growth, fast-paced upward trajectory? These are questions that affect the entity formation. In other words, you may, or may not, need to be a Delaware corporation right now.
VCs will want me to be a Delaware C Corp because all the standard investment forms are based on Delaware law.
Although this is an accurate statement as a general rule, are you really getting VC money, right now, the minute you form in the U.S.? Likely not. If you want to become a Delaware corporation down the road due to investor demands, you can do a conversion. It’s a little more lawyer time and paperwork. Be sure and consult your attorney and an accountant about any fundraising plans.
It’s quicker and easier in Delaware to form a company.
It is true that Delaware, having made an industry out of businesses incorporating there, has exceptional customer service. Do you need the entity, for tax or other reasons, tomorrow — or today? Then Delaware is a good choice all other things being equal. You can get very expedited service — at a cost. One-hour service will cost you $1000.00. (24-hour service is just an extra $100.) Fee schedule here.
Expedited service with the Texas Secretary of State is only $25 dollars extra, which means “the documents are processed before other documents received the same day and the filing party is notified in writing, by email or by telephone of the filing disposition.” Their goal is “to provide notification of filing disposition by the close of business the first business day following the day of receipt.”
Any other reasons why forming in Delaware seems to be such a big deal?
Given my litigation background, one big difference I have to mention is that if you form your company in Delaware, the company’s “internal affairs” are governed by Delaware law. However, if litigation erupts with a dispute over a matter that constitutes the company’s “internal affairs” — such as a proxy fight, a breach of fiduciary duty claim, or an appraisal challenge — are you going to actually get the benefit of that Delaware law and judicial expertise in whatever forum (court) the plaintiff chose to file that lawsuit? Probably not. Strategies exist to address this question, but they require consulting an attorney to understand those options.
C. Corporation versus Limited Liability Company: Vocabulary Matters
That first conversation with a lawyer about forming your entity will be full of jargon. A primer follows. Rest assured this is not an issue only for non-U.S. founders entering the U.S. market. Getting the structure and vocabulary distinctions right for the different corporate entities presents a challenge even for the first-time, U.S.-born startup founder.
1. Corporation
The owners of a corporation are shareholders. Ownership is represented in shares, or stock, in the corporation. A corporation is run by a board of directors; daily operations are managed by the corporation’s officers. Shareholder rights and duties are stated in a Shareholders’ Agreement, and the rules by which the Board of Directors governs the entity are stated in the by-laws. The initial startup documents also may include various written consents by which the board ratifies actions of the corporation that are part of a normal part of starting up operations: electing officers, authorizing the stock was that issued, opening a bank account, and authorizing acts of the person who initially acted as the incorporator.
A corporation is formed in the eyes of the state (in Texas, for example) by filing a Certificate of Formation at the Secretary of State (SOS) website or dropping it off in person — as just two examples. The filing fee is $300.00. If you formed your company in Delaware but you will be “doing business” in Texas, Texas law states that the company must register with the State of Texas. Registration as a “foreign” (non-Texas) company costs $750.00. Texas law does not define, however, what exactly “doing business in Texas” means for registration purposes.
- The S Corp: This terminology is a question of tax treatment of the corporation. Electing this status has advantages on the tax side, such as savings on the self-employment tax, but it is not available when any of the owners is a “nonresident alien” in IRS terms. Having a green card will support S Corp status because the green card holder is not a “non-resident alien.” The “substantial presence” test also will put the shareholder in “resident alien” status. An S Corp can only have one class of stock and no more than 100 shareholders.
- The C Corp: This is the “classic” corporation. There is nothing you need to do to have C Corp status. It will happen by default. But know that one big difference between the LLC and the Corporation (i.e., a C Corp) is the tax treatment. A corporation is a separate legal entity, or legal person, so of course it must pay taxes. This means that the corporation pays tax at the corporate tax rate, and then the shareholder/owner must also pay a tax on the dividend received from the corporation. This is the “double taxation” issue.
2. Limited Liability Company (“LLC”)
The owners of an LLC are members who own percentage interests in the LLC. Members do not have to be individuals. They can be corporate entities as well. Because an LLC reflects ownership in terms of member interests, an LLC does not issue stock for fundraising purposes. It sells member interests. The rights and duties of the owners of an LLC are included in an Operating Agreement, which is comparable to a corporation’s by-laws. Unlike a corporation, an LLC does not have a board of directors for its management. It has a different structure and vocabulary. The company must choose at the time of its formation to be managed by its members or by a manager. Generally, in a member-managed LLC, the members have an active role in operations and decision-making. In the manager-managed LLC the members have opted to vest management and decision-making authority in a manager, in a structure analogous to how a board of directors operates. You should address your company’s situation with an attorney.
As in the case for a corporation, the formation of the LLC can be done with a simple on-line form filed with the Secretary of State. The site states that the form meets minimum legal requirements. Forming an LLC and filing that single piece of paperwork with the Texas SOS costs $300.
Even if your company’s LLC has a single member — you — an operating agreement is still highly recommended. It helps fortify that separateness between the entity and the individual (that “corporate veil” that shields the individual from the corporation’s debts and liabilities). Because of additional concerns in the single member scenario for an alter ego “veil piercing” claim — by which a disgruntled customer or vendor may seek in litigation to “disregard” the entity and recover damages from the company’s owner — consult an attorney about best practices to ensure you properly operate your single-member LLC.
D. Registered Agent: A Must-Have
Forming an entity requires designating a “registered agent.” This is the person or entity who must be available during working hours to accept service of process for the company (i.e., the paper that is delivered to you that says “you have been sued”). If you formed your company in Delaware, you will have to choose a registered agent in Delaware. If you are operating a Texas office and doing business in Texas such that you must register in Texas, you also must have a registered agent in Texas. You may choose to act as your own registered agent (for Texas), but the law says this person must be available, at a real address (in Texas) — not a post office box — on every working day during working hours. Just know that the registered agent’s address is a matter of public record. If the registered agent’s address changes (and that means your address if you are the registered agent), you must update the official public record accordingly. Of course, there are services that perform this registered agent function for a fee. Shop around or ask your attorney for his or her thoughts on options.
E. Forms Versus Real Lawyer
You may ask: Why do I need to hire a lawyer if all I need to do is file a form on the Secretary of State website? It’s a good question with a good answer. There are many other rules that dictate how the company will be operated to ensure it is running properly under whatever law it was formed: rules such as who will run it, how voting rights are established, and how shares or an LLC member’s interests are transferred and valued. Those documents are the operating agreement for the LLC and the by-laws for the corporation. Proper management of the entity’s “internal affairs” pursuant to these documents is known as “corporate governance.” That term implicates the many details that go into properly operating the entity, such as meetings, record-keeping — if required — and the like.
There are no forms for these documents on the Secretary of State website. There are, however, many services, even law firms, that offer form documents. It is up to you to decide if you want to take the chance with a form or take the time to understand what is best for your situation by having your own attorney review your situation, answer your questions, and explain what all those agreements mean. Once the company is formed, legal duties and responsibilities kick in immediately: you need to understand what those documents say to ensure the company operates properly in accordance with those documents.
Part 2 in this series will address a few other administrative details that any new company needs to be aware of in the early days post-formation.
[1] Austin’s food scene has been exploding, but PACHA was around long before its Burnet Road location became hip and trendy. The Pacha Latte is an Austin original.
[2]This guide addresses, for informational purposes only, the visa situation for the business owner or entrepreneur who decides to up and move to Austin, Texas to start a business, open a U.S. office for an existing French company, or buy into an existing business. It does not address the case of a French company moving employees to an existing U.S. office.
[3] Tex. Bus. Org. Code Ann. § 21.403(a) (“board of directors of a corporation may consist of one or more directors”); Del. Code Ann. tit. 8, § 101 (“Any person…singly or jointly with others…may incorporate….”); id. § 141(b) (“The board of directors of a corporation shall consist of 1 or more members”).
[4] See 8 Del. C. § 102(b)(1) and 8 Del. C. § 109(b) (authorizing broad discretion for a corporation so long as conduct not prohibited under Delaware law); Jones Apparel Group, Inc. v. Maxwell Shoe Co., Inc., 883 A.2d 837, 845 (Del. Ch. 2004) (“[T]he Delaware corporation enjoys the broadest grant of power in the English-speaking world to establish the most appropriate internal organization and structure for the enterprise.”).