The hidden complexity of the state vs. federal divide

The United States is a single market of over 330 million consumers, but it operates as a collection of distinct legal jurisdictions, each with its own corporate governance rules. Unlike most countries with a single national registration, U.S. companies must interact with both federal and state authorities. This dual structure allows for strategic incorporation choices but also increases compliance obligations as your business expands.

The federal government oversees areas such as immigration, securities regulation, and income taxation. States control core aspects of corporate existence, including formation, annual reporting, franchise taxes, and internal governance. For example, a company incorporated in Delaware is always subject to Delaware law, regardless of where its founders or customers are located. This structure means your incorporation state requires ongoing attention and expense.

• The IRS issues your Employer Identification Number, but your state of incorporation determines your corporate governance rules

• Federal tax obligations exist alongside state-level franchise taxes, income taxes, and gross receipts taxes

• Securities regulations operate at both federal and state levels, with state "blue sky" laws adding another compliance layer

• Employment law varies dramatically between states, affecting everything from non-compete enforceability to paid leave requirements

Why Delaware is the default for incorporation (and the franchise tax trap)

Delaware is the preferred incorporation state for venture-backed startups due to its advanced corporate laws and specialized court system. The Court of Chancery, which resolves business disputes without juries, has established a large body of precedent, making legal outcomes more predictable. Investors value this predictability, especially in complex transactions. For international founders seeking venture capital, Delaware incorporation is essentially required.

Many founders are caught off guard by Delaware’s franchise tax in their first year. Delaware uses two calculation methods: the Authorized Shares Method and the Assumed Par Value Capital Method. Startups that authorize many shares at low par value can face franchise tax bills over $80,000 by default. The alternative method usually lowers this to a few hundred dollars, but founders must choose it proactively. Many incorporation services do not explain this detail, resulting in unexpected tax bills for international founders.

• Delaware franchise tax minimum is $175 annually, but the maximum reaches $200,000 for large corporations

• The Assumed Par Value Capital Method requires reporting total gross assets, which most startups should use

• Annual reports must be filed by March 1st each year, with late fees accumulating quickly

• Registered agent fees in Delaware typically range from $50 to $300 annually

Foreign qualification: operating across state lines

A Delaware corporation is legally recognized only within Delaware, but operating in other states requires foreign qualification. This registration allows your company to do business outside its incorporation state. Failing to register can result in penalties, loss of legal standing, and personal liability for officers. Each state defines "doing business" differently, which creates uncertainty about when registration is required.

California aggressively asserts tax jurisdiction over companies with minimal connections to the state. Employing a single remote worker, having a physical presence, or earning significant revenue from California customers requires registration and payment of the $800 minimum annual franchise tax. Other states, such as New York and Texas, have their own requirements and costs. International founders often learn of these obligations only after receiving penalties or during financing due diligence.

The impact goes beyond registration fees. Each qualified state requires a registered agent, annual report filings, and possibly separate tax returns. Operating in ten states can mean ten compliance calendars, ten registered agents, and ten sets of filing fees, not including tax obligations.

The administrative burden of compliance and nexus

Nexus determines when your company has enough connection to a jurisdiction to trigger tax and regulatory obligations. Previously, physical presence was the main standard, but the 2018 Wayfair decision expanded states' authority to tax remote sellers based on economic activity. This change means compliance obligations now grow with your business activity, not just your physical presence.

As your business grows and enters new markets, you must continually assess your nexus exposure. Even without employees outside your home state, you may have sales tax nexus in many jurisdictions due to revenue or transaction thresholds. Managing these obligations, collecting taxes, and filing returns in each state is complex and costly. Many international founders underestimate the effort and expense required for multi-state compliance.

The nightmare of multi-state sales tax

Sales tax compliance is one of the most challenging aspects of operating a U.S. company, especially for those selling digital products or services. The U.S. has no national sales tax; instead, there are over 10,000 tax jurisdictions, each with its own rates, rules, and exemptions. A single transaction may involve multiple layers of taxes, each with different definitions of taxable goods and services.

Economic nexus thresholds differ by state, often triggered by $100,000 in annual sales or 200 transactions. Exceeding these thresholds requires you to collect and remit sales tax. Complexity increases because states disagree on what is taxable. For example, software as a service is treated differently in Texas and New York, and digital goods may be taxable in some states but not others.

• Texas taxes SaaS at the full state rate, while California generally exempts it

• Origin-based states require you to collect tax based on your location; destination-based states use the customer's location

• Marketplace facilitator laws in most states shift collection responsibility to platforms for third-party sellers

• Filing frequencies vary from monthly to annually, depending on your tax liability in each state

Registered agents and mandatory annual filings

Each state where your company is incorporated or qualified requires a registered agent to receive legal documents and official correspondence during business hours. International founders without a U.S. address must use commercial registered agent services, and these costs add up across multiple states. For example, a company qualified in fifteen states may spend $1,500 to $3,000 per year on registered agent fees.

Annual report filings are another ongoing compliance requirement. They update the state on your company’s officers, directors, and registered agent. Deadlines vary by state and are often based on your incorporation or qualification anniversary, not the calendar year. Missing these filings can result in late fees, administrative dissolution, and delays during financing or acquisition due diligence.

• Delaware annual reports are due March 1st with a $50 filing fee plus franchise tax

• California Statement of Information filings are due within 90 days of incorporation and biennially thereafter

• Some states require separate filings for the Secretary of State and the tax authority

• Good standing certificates, often needed for bank accounts and contracts, become unavailable when filings lapse

Navigating the banking and fintech bottleneck

Opening a U.S. business bank account as a non-resident founder is often one of the most challenging steps in company formation. Banks must verify customer identities and assess money laundering risks, leading to increased scrutiny for non-resident applicants. Know Your Customer (KYC) requirements and banks’ cautious approach to unfamiliar situations create barriers that are not always resolved by providing documentation.

Fintech alternatives and neobanks now serve international founders, but these options have limitations. Many fintech platforms do not offer the full range of treasury services, credit facilities, or institutional relationships that growing companies require. As a result, international founders often use fintech accounts initially and add traditional bank accounts later, once they have established a U.S. presence.

The EIN waiting game for non-residents

The Employer Identification Number (EIN) is your company’s tax ID with the IRS. Non-resident founders cannot use the instant online application available to U.S. persons. Instead, you must submit Form SS-4 by fax or mail, and processing can take several weeks during busy periods.

Some founders try to speed up the process by calling the IRS, but the international EIN phone line has limited hours and long wait times. Third-party services can obtain EINs for you, but these must be structured carefully to ensure the EIN is linked to your company. Delays in obtaining an EIN can postpone bank account setup, payment processor integration, and other services that require tax identification.

• Faxed SS-4 applications typically receive responses within four business days

• Mailed applications can take four to six weeks during normal periods

• The IRS international EIN phone line operates Monday through Friday, 6am to 11pm Eastern Time

• Incorrect information on the SS-4 can result in an EIN issued under the wrong entity type

Why traditional banks may reject your new entity

Traditional banks assess business account applications using risk factors that often disadvantage new companies with non-resident owners. Your company lacks U.S. credit history, your personal credit may not transfer, and banks may struggle to verify your identity. As a result, rejection rates are much higher than domestic founders expect.

Rejections often come without clear explanation, leaving founders unsure whether to reapply, try other banks, or seek alternatives. Some banks require in-person visits, which is difficult for founders abroad. Others require minimum deposits, existing relationships, or referrals. This process can take months, during which your company may be unable to receive payments or pay vendors.

• Major national banks frequently reject applications from newly formed entities with non-resident owners

• Regional and community banks sometimes offer more flexibility but may lack international wire capabilities

• Credit unions occasionally serve business customers but often restrict membership geographically

The high cost of professional services

Professional service costs for U.S. company formation and compliance are often much higher than international founders expect. Legal complexity, regulatory requirements, and the need for specialized expertise drive fees that can consume a large portion of early-stage capital. Understanding these costs in advance enables better financial planning and helps founders decide when professional help is necessary.

Trying to save on professional service costs by handling everything yourself or choosing the cheapest options often backfires. Mistakes in formation documents, tax elections, or compliance filings can be expensive to fix later. International founders are especially at risk because they may not recognize issues until significant consequences arise.

Legal fees: avoiding 'DIY' document disasters

Incorporation services may offer low-cost formation packages, but these usually do not include the legal documents needed by venture-backed startups. Proper governance requires bylaws, board resolutions, stock purchase agreements, IP assignment agreements, and possibly founders’ agreements. Using generic templates or omitting these documents can cause issues during investor due diligence.

Startup law firms usually charge $3,000 to $10,000 for a comprehensive formation package with all required documents and board resolutions. While this is a significant investment, fixing documentation issues during a financing round often costs more and causes delays. International founders should budget for proper legal setup and avoid cutting corners on essential documents.

• Intellectual property assignment agreements ensure the company owns what founders create

• 83(b) elections for founder stock must be filed within 30 days of stock issuance

• Stock option plans require board approval and often shareholder approval before grants

• Employment agreements for founders should address invention assignment and confidentiality

A CPA is necessary for complex IRS reporting

Tax compliance for U.S. companies with international founders involves reporting far beyond standard corporate returns. The IRS requires detailed disclosure of foreign ownership, foreign bank accounts, and related-party transactions. Forms such as 5471, 5472, and FBAR carry significant penalties for non-compliance, and their complexity is beyond most general tax software.

A CPA with international tax experience is essential for companies in this situation. Specialized tax preparation usually costs $2,000 to $5,000 per year for early-stage companies, with higher fees as complexity increases. While this may surprise founders, the risk of penalties for incorrect or missing filings makes the investment worthwhile.

• Form 5472 requires disclosure of reportable transactions with foreign related parties

• FBAR filing obligations apply to U.S. companies with signature authority over foreign accounts exceeding $10,000

• Transfer pricing documentation may be required for transactions between related entities

• State tax returns add to the preparation burden and cost

Employment law and the benefits arms race

Hiring employees in the U.S. involves a regulatory framework that is very different from most other developed countries. The lack of federal requirements for paid leave, notice, or severance gives employers flexibility, but also creates expectations for voluntary benefits. Competing for talent requires understanding both legal requirements and employee expectations.

U.S. employment law is decentralized, so state requirements vary widely. California requires paid sick leave, meal and rest breaks, and strong wage protections, while Texas has fewer mandates. Companies hiring in multiple states must comply with the strictest applicable rules for each employee, resulting in a complex set of obligations.

At-will employment vs. implied contracts

At-will employment, which allows either party to end the relationship at any time for any lawful reason, is the default in most U.S. states. This flexibility differs from the notice and termination protections common elsewhere. International founders may benefit from this agility but should avoid unintentionally limiting at-will status through contracts.

Offer letters, handbooks, and verbal statements can create implied contracts that alter at-will employment. Promising termination "for cause" or specific disciplinary steps may be seen as contractual commitments. Having employment documents reviewed by counsel familiar with state law helps preserve flexibility and ensures professional communication with new hires.

• Montana is the only state that does not recognize at-will employment for established employees

• Discrimination laws prohibit termination based on protected characteristics regardless of at-will status

• Retaliation claims can arise when termination follows protected activity like whistleblowing

• Written at-will acknowledgments in offer letters and handbooks help preserve employer flexibility

The reality of healthcare and workers' comp costs

Employer-sponsored health insurance is a standard expectation for full-time U.S. employees, and the cost often surprises international founders. Small group premiums can exceed $500 per employee per month for individuals and $1,500 or more for families. These expenses are in addition to salaries and form a significant part of total compensation.

Workers’ compensation insurance is required in almost all states and covers medical expenses and lost wages for job-related injuries. Premiums depend on industry, payroll, and claims history, ranging from under 1% to over 10% of payroll. International founders must secure coverage before hiring employees, as operating without it can result in severe penalties.

• The Affordable Care Act requires employers with 50 or more full-time equivalent employees to offer coverage

• Small employers can access coverage through SHOP marketplaces or private brokers

• PEO arrangements can provide access to better rates through larger risk pools

• State-specific requirements for workers' compensation vary in coverage details and exemptions

Intellectual property and long-term scalability

Protecting intellectual property in the U.S. requires proactive action, which international founders sometimes delay while focusing on product development. The U.S. uses a first-to-file trademark system, so competitors can register marks you use if you do not file first. Patent protection requires timely disclosure, and trade secret protection needs documented confidentiality. Establishing these protections early is far less costly than addressing issues later.

The scalability of your U.S. business depends on the foundation set during formation and early growth. Clean records, proper IP assignments, compliant employment practices, and organized financials enable your company to raise capital, acquire others, or be acquired without major issues. International founders who invest in these fundamentals are better positioned for future opportunities.

Building a U.S. company as an international founder requires more than a strong product and determination. You must navigate a system built on assumptions of local knowledge you may not have. Successful founders treat compliance and administration as seriously as product development, understanding that operational excellence supports growth. Your advantage comes from mastering these complexities, not avoiding them.

Legal disclaimer: This article does not constitute legal advice. Laws vary by jurisdiction. Consult a qualified attorney for advice specific to your situation.