California is the epicentre of all things startup and tech company related. Australia has had some great local startup success stories, and there is an increasing appetite to foster these types of businesses here. However, it does not rival the volume, pace and accessibility of startup culture that you will find in places like Silicon Valley, San Francisco and more recently, Santa Monica (according to AngelList.co there are over 45,000 startups in California).
Palm trees, Hollywood and eternal sunshine aside, there are some things to think about as an Australian startup wanting to make a move to California, or anywhere in the United States for that matter. If you are considering moving to the U.S. – colloquially known as a ‘flip up’ – there are four broad points to consider.
1. The ‘Land of Opportunity’ – If You Can Get In
As Australians, we are lucky with how easily we can move around the world. However, the United States has stringent rules about obtaining immigrant or working Visas. One of the most common working Visas available for Australians is the E3. While it is comparatively easy to get, it still has many restrictions. Namely, that it is only for employees of U.S. businesses and recipients cannot explore other work or business opportunities outside of their employment. So if you are a business based in Australia and you want to set up shop in the United States, you will likely be looking at a much more complicated road to gaining entry.
Some of the other ways for startup founders or employees to obtain Visas include:
- setting up wholly owned subsidiaries;
- entering into joint ventures with U.S. based businesses; or
- working with startup incubators.
2. The Business of Structuring Your Business
The compliance burdens placed on organisations in the States are very different to Australia. There are many pieces of legislation and regulations that impact a business both at a federal and state level.
The most striking difference between Australia and the U.S. in this regard is that corporations incorporate at a state, not a federal level. Each state has its legislation and regulations, and the differences between each state’s laws can be dramatic.
Often, international businesses moving to the U.S. are advised to incorporate their business in Delaware regardless of where the company will base itself. The reason is that Delaware has fewer compliance obligations than other states. It is favourable if you plan to go down an Initial Public Offering (IPO) path as Delaware entities allow for a lot of flexibility on how to operate and grow.
If the plan, however, is to base your startup in a state other than Delaware (e.g. California), you will have compliance burdens that the state dictates. That is especially the case if you sell goods and services as there are state-based tax implications that will impact your business. The key takeaway is that while there are long-term advantages to incorporating in Delaware, there may also be a short-term increase in compliance costs.
Additionally, nothing is stopping a startup from setting up in California and then moving the business to Delaware at a later date. While this can be costly, it may be an option if the initial plan is to test the viability of the startup’s concept in the U.S. by basing yourself in somewhere like California.
3. Compliance Culture
There are huge regulatory differences between the U.S. and Australia. However, those differences also extend to the individual states within the U.S. States have different tax systems, different employment laws and as mentioned above, various corporations legislation and regulations.
Employment law is especially relevant for startups moving from Australia to the U.S. and California in particular. California is considered a more employee-friendly state than other U.S. states as the law affords employees certain protections that other states do not offer. For instance, the Californian law prohibits non-compete clauses as a general rule, potentially allowing your employees to leave your startup and work for a competitor at any time.
As touched on above, corporate laws and regulations differ from state to state in America. The biggest difference to Australia, however, is the compliance burden. The Secretary of State of the particular state you incorporate in administers most of the corporation set up and compliance obligations. As part of the compliance requirements, there is a substantial amount of paperwork and ongoing filing requirements through the year. For this reason, many choose Delaware over other states because there is a lot more flexibility around the types of changes that a business can make with minimal input or notification to the regulatory body.
Another major consideration is the incredibly complex U.S. tax system which has state-based nuances that will likely impact your startup. California, in particular, has some of the highest state-based tax rates for individuals in the U.S. and this may have an impact on founders who decide to move their startup to Silicon Valley or other parts of the state. There are also tax implications around moving businesses from Australia to the U.S. that you need to deal with before making a move overseas.
Further, California has very strict environmental regulations. The cost and time associated with ensuring compliance with the environmental regulations can be the difference between whether your idea is viable or not. You should weigh up all these extra compliance measures and costs before making your decision.
4. The Benefits
California is one of the largest economies in the world, and it offers many growth opportunities for startups. It is particularly important for startups that might be looking for funding in the U.S. to have a U.S. foothold. Investors feel more comfortable as they understand the corporate and regulatory structures and do not have to get their heads around an external regulatory environment such as Australia’s.
On a more practical level, it helps to be on the ground. California is all about networking and developing relationships, and this can take time. It is hard to establish a rapport with potential investors, co-founders, incubators, mentors or anyone else without pounding the pavement continuously. There are also significant benefits of being based in a part of the world where there are so many other startups because it is a hub of resources, talent and money for investment.
California, and America more generally, offer some fantastic opportunities for Australian startups. The decision to move your business could mean access to some of the best talent and investment possibilities in the world. The process, however, is complicated and can take a lot of time to complete. There are many implications of moving your startup from Australia to any other jurisdiction, and you must plan and know what the real cost will be to your business. Getting sound strategic and legal advice at the outset can save you a fortune in costs later, so we always advise founders who are thinking of making a move to take the time to consider every angle beforehand.
Are you a startup and have questions about moving overseas? Get in touch with our startup lawyers. Call us on 1300 544 755 or fill out the form for quick and efficient advice.
The tax information contained in this article is not tax advice and should not be relied on as such.
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