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Pitfalls and Hacks of Setting up a Startup as a US-Based Entity Based on Own Experienceby@johnrush
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Pitfalls and Hacks of Setting up a Startup as a US-Based Entity Based on Own Experience

by John RushMarch 14th, 2023
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MarsX is a young startup that has faced many challenges on its journey. After a few years, with almost $2 million in revenue and more than 2000 transactions, we know how hard it can be for small businesses to set up a legal entity and follow US law. Using AI and automation can save startups thousands of dollars in legal and accounting fees.
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MarsX is a young startup that has faced many challenges on its journey. After a few years, with almost $2 million in revenue and more than 2000 transactions, we know how hard it can be for small businesses to set up a legal entity and follow US law.

This article is about our experience of setting up a US-based entity for our startup. We faced many challenges, but we found ways to make things easier and cheaper. The legal system in the United States can be very complicated and confusing, and hiring top law firms can be expensive. That’s why we turned to AI-powered tools like ChatGPT to help us with accounting and automating our processes. We hope our experience can help other startups save money, free up their time, and focus on their core business of software development.

The Pitfalls of Law in the USA

As a startup, establishing a legal entity and complying with US law is crucial.

For instance, few people know that accountants are not responsible for anything. Generally, the company that hires the CPA is ultimately responsible for the accuracy of its financial statements and disclosures. The CPA’s role is to provide professional expertise and services to assist the company in meeting its reporting obligations, but the company remains responsible for the information presented in its financial statements and disclosures.

Those who have hired a CPA should know that they act as advisers. That being said, CPAs may face disciplinary action from their state licensing board or professional organization if they make a mistake that results in financial harm to a client. However, in the contract that the SPA sends you, there is always a clause where you promise not to sue them. It turns out that under the law, they have little responsibility, almost none. But you can still sue them if they make a mistake.

It’s me working on MarsX in its early stages while also being a happy father to my baby girl Alice.

To solve this problem, we turned to AI-powered tools like chatGPT to simplify the accounting process and reduce costs. Using AI and automation can save startups thousands of dollars in legal and accounting fees. By not being afraid to try new things, we were able to simplify the accounting process and reduce costs. I’ll tell you more about our case later in this article.

Mandatory Reports

As a Delaware C-Corp startup, there are two mandatory reports that need to be filed each year:

Delaware franchise taxes: Due by the end of February (if registered in Delaware).

Income tax: Due by April 17th

Delaware franchise taxes can be filed and paid by yourself. The information you need is as follows:

  1. Your company’s total gross assets (cash, equipment, property, etc.) as of December 31, 2022. Your accountant should have this information if you don’t. For most, this is just the balance of your company’s bank account as of the last day of the year.
  2. The total number of shares issued, both common and preferred (If there have been any amendments). If you have more than one class of stock authorized, please list the number of shares issued by class of stock.
  3. The name of one of the officers (usually the CEO) and all of the directors of the company.
  4. The report also requires an address for the officer and directors, but we can use the address of your Delaware registered agent. If you would prefer we use another address for the officer and directors, please provide it.
  5. Current phone number for the company.

For the income tax report, it is better to hire a tax lawyer. It will cost less than $1k if everything is prepared for him or her. The information you need to provide is:

  1. A copy of the Articles of Incorporation.
  2. The corporation’s tax ID number.
  3. Shareholders’ full names, addresses, and percentage of ownership. If you are from the US, please provide a US tax ID number. If foreign, please provide the country of citizenship.
  4. The corporation’s present address and telephone number in the US.
  5. The name of the president who will sign the tax returns.
  6. A brief description of the business of the corporation in 1–2 words.
  7. The 2022 profit and loss statement, which should include revenues, business travel expenses, supplies expenses, legal and professional expenses, and so on. Just one amount per each expense category and total amount of revenues.
  8. All bank balances of the company’s bank accounts on December 31, 2022.
  9. Any liabilities the company had on December 31, 2022. If so, please list them.
  10. Confirmation that your company has only US bank account(s).

By following these steps, you can simplify the legal and accounting processes for your startup and focus on your core business of software development while saving money in the process.

How AI Simplified Accounting for Our Small Business

We are always looking for ways to simplify processes and reduce costs, especially when it comes to accounting and legal fees.

One of the first steps is to create a legal entity, and services such as Clerky can help with this for less than $1k.

We quickly learned that accounting could be one of the most complex and confusing aspects of running a business.

One of the biggest challenges we faced was the accounting process. We had just established our business and had received SAFE (an investment contract between a startup and an investor that gives the investor the right to receive equity in the company on certain triggering eventsnotes as investments. We also had to deal with refunds, failed payments, and the challenge of accounting for them. We had 2000+ transactions in 2022, and we used crypto, which only added to the complexity.

Every question we had seemed basic, but no one could provide a clear answer. We were ping-ponged from lawyer to accountant and back and forth, with no one really sure of the right answer. We realized that the top law firms would cost us at least $20k.

Accounting software could do 10,000 things, but it is really hard to figure out how to use it for our particular case.

Our plan was to eventually make the accounting process automatic. But there were many things that were unclear, and everyone provided a different answer. For example, how to record the SAFE notes in the accounting books? We asked 5 people and got 5 answers. It was also unclear how to record crypto flows.

That’s when we discovered Quickbooks, a popular accounting software. However, it was impossible to figure out. We spent hours trying to understand how it works and how we could use it to simplify our accounting process.

Eventually, we turned to ChatGPT, an AI-powered chatbot that can provide answers to almost any question. We asked ChatGPT to guide us, and it provided us with step-by-step instructions for nearly everything. We validated it all with accountants and lawyers at the end, and they approved it. Initially, the accountants and lawyers often suggested a different thing, but later they agreed with ChatGPT.

Our use of ChatGPT saved us at least $10k because our books were such a mess that we were quoted $5k to start up and then $500 for each month. Now we automated everything via Quickbooks rules, and--moving forward-- there was no need to do anything, really. Just some rare cases when something unusual happens. We only need a CPA and Lawyer when we need to file the franchise tax report and income tax report once a year. This costs just $1k, and Quickbooks is $400 a year. So the whole company costs us $1.5k a year, and we have almost 2M in revenue and thousands of transactions.

We learned that building MarsX with the key goal to simplify software development and make it less expensive, we couldn’t give up on these values and just pay a lot for accounting and legal. So we solved it in the same way we solve our main mission: by using AI and automation.

When you automate all your accounting, you should feel happy and spend the saved time with your family or invest more in yourself.

In conclusion, accounting can be one of the most complex and confusing aspects of running a business. But with the help of AI-powered tools like ChatGPT, we were able to simplify the accounting process and reduce costs. We learned that it’s important to always look for innovative solutions and not be afraid to try new things. By doing so, we were able to not only save money but also free up our time to focus on our core business of software development.

Also published here.