US vs India: Where do you set up?

Summary

Deciding where to set up your company is crucial. A host of factors come into play, including the company's purpose, customers, talent, and taxes. While setting up abroad may seem tax-wise in some cases, having a subsidiary elsewhere with the main office in India has merits in others, such as in the Indian IT industry. Prioritise the essence of your business, rather than tax benefits, when choosing a location.

Companies across the world are racing towards being global. Indian companies are no exception. They are at the forefront of breaking age-old barriers. Dev wrote two excellent articles here and here exhibiting how Indian startups can be truly Limitless. 

When founders start thinking about global companies, after they have thought their idea through, the slightly unglamorous part of setting up a company takes root. The decisions the founders make at that stage can slow down or even change the way they do business. 

If founders make the right decisions for their companies upfront, it will help them achieve their ambition faster. So, where do you begin?

Through this piece, we’ll clear myths and try to chalk out how founders should pick their company’s country of domicile. 

‍

Is it better to set up your company in the US or Singapore, not in India?

We hear this a lot. 

The single most important question founders need to ask is what is the business solving for? If it is truly a cross-border or international use case, then go ahead and set it up overseas. 

Let’s break this down a little more. Founders should ask themselves if the nature of their business will serve customers across geographies. For example, are we selling to an international audience or a predominantly Indian one? If the answer is that their customers will be majorly in the US or Southeast Asia or other geographies, they should look at setting up in the international jurisdiction that best fits their customer density. 

“Remember, tax is an outcome of your business. In some significant situations, taxation can be one factor that founders can use to decide to set up in a non-Indian jurisdiction, but it should not be the leading criterion.”

Another important factor to consider in this decision is “substance”, or how you will rationally justify the incorporation of the company in a foreign jurisdiction. Will it be an artificial structure or will it be core to how the business is conducted? Consider where the senior talent is going to be based. If most of the key leaders of the organisation—CEO, CMO, CBO, Head of Product or Design, or engineering leader—are all going to be largely based internationally, for example in the US, then it’s a no-brainer to set up the headquarters there. This usually goes in line with the majority customer base, so that it’s far easier for founders and their teams to interact with their customers.

Can I set up a company in India and have a subsidiary in the US or another geography to be served?

Traditional Indian IT companies are a great example of having done this well. They set up Indian headquarters and then set up subsidiaries in the geographies they expanded to. However, their nature of work differs from what most startups are building today. Indian IT companies were historically service-based and solving for cost efficiencies with volume and scale, while entrepreneurs today are building products/ applications/ softwares that compete with the best in the world and often solve global problems.

And today, with the pandemic making borders more fluid, we have a wider acceptance of working from anywhere. It is perfectly valid for founders to ask if the domicile of their company even matters as long as they have a billing entity that can handle compliances in the geography where they’re doing business. 

As we recover from the pandemic, there is a higher propensity for facetime. So where should their “real” headquarters be?

The answer lies, as we stated above, in where the customer is based or where senior leadership is located. If the business requires the Founder, CEO, CTO, or the CMO of the company to have more direct touch points with customers, then it is better to be domiciled in the customer's geography. That explains why most of the SaaS coming out of India are being built in India but are domiciled in the US.

“Some businesses may be very sure of their market from the get-go, but some may want to test the product and its viability in different markets. Besides, there are uncertainties in the market at any given time that businesses have to factor in.”

A logical question here is how can every business know if their product will work well in geography outside India? They can’t. Some may be very sure of their market from the get-go, but some businesses may want to test the product and its viability in different markets. Besides, there are uncertainties in the market at any given time that businesses have to factor in. 

In these cases, it is better to avoid the enormous cost, effort, and regulatory compliances in building a company outside of India. It would do well for the business to set up in India, run for six to twelve months, and start testing out its model. And if, after this time, they feel that the US or another geography is a better fit, they can work with advisors to find legitimate ways to restructure the organisation.