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Foreign Entity Strategy for Promptable.ai

Location: owl-strategy/legal/foreign_entity_strategy.md

This document explains why Promptable.ai should incorporate in Delaware while operating physically and legally in South Carolina. It also addresses how to stay compliant without being physically present in Delaware.

Why Delaware (Even If You Never Go There)​

Or: Why Not Wyoming?

While Wyoming is a popular incorporation state for small businesses and privacy-minded entrepreneurs due to:

  • $0 corporate income tax
  • Low fees
  • Strong privacy protections

…it is less favored for startups planning to raise venture capital or establish credibility in the tech space. Most institutional investors, accelerators, and grant programs expect companies to be registered in Delaware — especially if they want to issue equity or preferred stock.

Delaware is still the best choice if you intend Promptable to be:

  • Scalable and fundable
  • Structured as a Public Benefit Corporation (PBC)
  • Legally transparent and venture-capital compatible

If you chose Wyoming instead:

  • You’d save on some fees and taxes (no franchise tax, no income tax)
  • But you may be asked to convert to a Delaware entity later anyway when fundraising

Conclusion: Delaware is still preferred for Promptable given your vision and growth goals, even if you never operate there physically.

Incorporating in Delaware is extremely common — especially for startups and internet companies — because:

  • It has business-friendly corporate laws (especially for C-Corps and PBCs)
  • Most investors prefer Delaware C-Corps (and PBCs are supported natively)
  • It has a streamlined online filing process and legal precedent for business disputes

You do NOT need to live in or visit Delaware.

Instead, you:

  • Hire a registered agent (Delaware requires this)
  • File all paperwork online or by mail
  • Maintain corporate records and taxes remotely

Delaware will act as your company's legal “home,” not your operational one.

South Carolina as the Operating State​

Since you're physically based in South Carolina and plan to:

  • Open a Promptable PBC bank account there
  • Possibly hire or contract from there
  • Use a local mailing or office address

...you will need to:

Register as a Foreign Corporation in SC​

  • This allows your Delaware corporation to legally operate in SC
  • You'll pay a one-time filing fee + annual compliance (much simpler than full incorporation)
  • SC treats this like a “permission to operate” for an out-of-state company

You may also need a South Carolina business license depending on local laws (county or city specific).

What About Other States?​

You do not need to register in other states unless:

  • You open an office there
  • Hire an employee/contractor there
  • Or establish a meaningful operational presence (e.g., physical server, in-person client base)

Example:

  • Your co-founder lives in Pennsylvania → no registration needed unless Promptable has a formal office, employee agreement, or contract signed under the business entity in PA.

Tax Implications​

How South Carolina Compares Nationally​

South Carolina's 5% flat corporate income tax is moderately low compared to other states:

StateCorporate Tax RateNotes
South Carolina5.0%Flat rate, startup-friendly
California8.84%High-tax state
New York6.5% (varies)Scales with income and entity type
Delaware8.7%Applies only if operating in-state
Florida5.5%Slightly higher than SC
Texas0% (margin tax applies)No corporate income tax, taxed on revenue
Wyoming / S. Dakota0%No corporate income tax
Massachusetts8.0%Flat rate
Pennsylvania8.99% (dropping)Gradually reducing to 4.99% by 2031

Conclusion: South Carolina offers a competitive tax rate and simple calculation, making it a practical base for Promptable.ai.

Delaware (Incorporation State)​

  • Franchise Tax: You must pay an annual franchise tax to Delaware. This is not based on income and is typically $400–$600/year.

    • The minimum is $175, but can exceed $1,000+ depending on the number of authorized shares or valuation method used.
    • This is due every year by March 1st, and you must file an Annual Report at the same time (additional $50 fee).

  • No State Income Tax: Delaware does not charge state corporate income tax on companies that do not operate physically in the state.

Note: If you do business in Delaware (e.g., have offices or employees there), you would also pay Delaware state corporate income tax — but this doesn't apply to Promptable.

  • Franchise Tax: You must pay an annual franchise tax to Delaware. This is not based on income and is typically $400–$600/year.
  • No State Income Tax: Delaware does not charge state corporate income tax on companies that do not operate physically in the state.

South Carolina (Operating State)​

  • Corporate Income Tax: You will pay South Carolina's flat 5% corporate income tax on income that is attributed to SC-based operations.
  • Business Licenses: You may also need to pay local business license taxes or fees depending on your SC jurisdiction.
  • Payroll Taxes: If you hire in South Carolina, you'll also handle employee-related taxes there.

Other States (e.g., California Client)​

  • If a client in another state (e.g., California) pays you $50,000/year for a subscription to your platform (e.g., Sova), you do not pay income tax to California unless:

    • You have employees, a sales team, or agents based in CA
    • You establish a physical presence or office there
    • You cross certain economic nexus thresholds (CA currently applies nexus if annual sales into CA exceed $690,144 [as of 2023])

Key Rule: Most SaaS businesses do not owe income tax to client states unless they have significant economic or physical nexus there.

ActionStatePurpose
Incorporate as PBCDelawareLegal base, investor-friendly structure
Register as Foreign EntitySouth CarolinaOperational base, bank, address, team
No registration (unless needed)Pennsylvania (or others)Only register if you expand operations

How South Carolina Detects Unregistered Foreign Corporations​

Even if Promptable is legally formed in Delaware (or another state like Wyoming), South Carolina may discover you're operating there if:

  • You open a business bank account using an SC address
  • You use an SC mailing or office address on contracts or your website
  • You rent physical space, such as a co-working office or PO box
  • You hire employees or contractors located in SC
  • You apply for a local business license
  • You report income or expenses tied to SC on federal tax filings

These actions create a public or paper trail that can trigger a compliance review by the South Carolina Secretary of State or Department of Revenue.

🚨 What Happens If You Don’t Register?​

  • You may be fined or penalized for operating illegally
  • You may not be able to enforce contracts in SC courts
  • You could lose access to local grants, legal protection, or licenses

✅ Solution:​

Register as a foreign corporation in South Carolina once you start:

  • Earning revenue while based in SC
  • Hiring or contracting in SC
  • Signing contracts under the Promptable PBC name using an SC address

This ensures you're fully compliant with South Carolina law and able to grow safely.

📝 Reserving the Name Promptable in Delaware (PBC Consideration)​

When reserving your business name in Delaware, you’ll notice that there is no specific option to reserve a name as a 'PBC' (Public Benefit Corporation). The reservation system only supports suffixes like Inc., Corp., or LLC.

✅ What to Do:​

  • Reserve the name “Promptable Inc.” or simply “Promptable” as your corporate name

  • Then, when you file your Certificate of Incorporation, you can:

    • Legally designate the company as a Public Benefit Corporation
    • Use the name “Promptable PBC” or “Promptable Public Benefit Corporation” in all your legal and marketing materials

✅ Why This Works:​

  • Delaware only cares about name uniqueness and legal compliance during reservation — the suffix used for PBCs is governed by the incorporation documents, not the name reservation step
  • During incorporation, the PBC designation becomes official, and you're allowed to use "PBC" or "Public Benefit Corporation" in your full legal name

🔐 You are fully compliant and can operate as Promptable PBC once the certificate is approved — regardless of how the name was reserved.

✅ Next Steps​

  • File your Delaware Promptable PBC incorporation with a registered agent
  • Apply for SC foreign registration (and local business license if needed)
  • Open your business bank account and establish SC mailing address
  • Maintain remote governance and compliance from SC

Promptable will be fully compliant, investor-ready, and mission-aligned — even if you never set foot in Delaware.