You have this brilliant idea. You work hard turning your idea into reality. Your startup was finally established, and things are going well. Then it's decision time: Should I or should I not incorporate my startup?
A tough decision, indeed. There are pros and cons that come with business incorporation. This article is not about the pros and cons. Rather, this article is about one of the options you have when you (finally) make a decision to incorporate your business. So, if you are at this stage of your business journey, read on.
Company formation: LLC or Corp?
Forming an LLC, S Corp or a C Corp is a decision that boils down to your needs, requirements and vision for your startup. So, it's about choosing one among those, and you are ready to take action, right? Unfortunately, it's not. It's just the beginning of all things that many entrepreneurs are not fancy doing/experiencing it.
Getting incorporated means that you'll soon face the complexity of your financial reporting. The capital requirements of forming the legal entity. The formalities that include annual shareholder meetings. The complexity in sharing profits among your shareholders. The series of taxes that – more often than not – strangle your startup's growth. Those things are major roadblocks.
Sure, structured as an LLC means fewer formalities and more flexibility for the owners. However, it still poses headaches to entrepreneurs.
As if choosing your legal entity is not challenging enough, now you need to decide where you should incorporate your business. In the US, each state's has its set of requirements, and – again – the pros and cons to consider.
An alternative: Offshore company formation
Actually, there's one: Offshore company formation.
Offshore companies are organized similarly with the onshore companies – with some visible benefits.
First and foremost, although your company is legally and physically located in an offshore jurisdiction, such as Hong Kong, Belize or Ras Al Khaimah (RAK), you don't have to operate your business in the jurisdiction of your choice. Instead, you can do business in any part of the world.
This flexibility is well-sought-after by entrepreneurs whose business are doing business globally, such as multi-national company and online business.
Now, as an offshore company, you can do things that an onshore company can do – with added features, such as the business activities that you may not be able to do when you setup a company in your home country, such as investing in the offshore jurisdiction's investment vehicles (More on this later on).
What can you do with your offshore company?
Of course, this is not the only perk – here are what you can do with your offshore company:
1. Invest
Sure, as an onshore company, you can invest on various investment vehicles. But with an offshore company, you can access local jurisdiction's investment opportunities that are restricted to foreign companies.
You can trade in the stock markets, invest in local real estate, and so on. Offshore jurisdiction of Ras al-Khaimah (RAK), for example, allows you to buy local properties throughout the Uni Arab Emirates (UAE) regions. This is a huge benefit if investing your company's liquid assets is in your business growth plan.
2. Protect assets
This is (or should be) your number one reason for setting up your company offshore, especially when your local jurisdiction's economical and political situation is unstable.
Jurisdiction like Hong Kong adds more value to the jurisdictional stability: Excellent reputation.
3. Reduce requirements
Fewer requirements for establishing an offshore company mean more flexibility for you.
The flexibility in your company structure – you can choose any structure you want with less complex reporting requirements, minimal capital requirement, less accounting complexity, and minimal administrative requirement mean that you can reallocate your resources for managing those into what matters: Improving sales and gaining market shares.
4. Reduce costs
With limited reporting requirements mentioned above, an offshore company usually has lower maintenance and operating fees. Furthermore, you may set up a virtual business address in the offshore jurisdiction of your choice, reducing your costs even more.
5. Reduce taxes
In relation to the cost reduction mentioned above, offshore jurisdictions are legally allowing you to pay fewer taxes. Of course, this varies from one jurisdiction to another, but, generally speaking, you will enjoy some tax benefits when you setup an offshore company.
As taxes take a large portion in your expenses column, a reduced taxes (some jurisdiction even imposes no tax for business activities that are done outside the jurisdictional boundaries) means that your overall business costs are reduced even more.
Of course, you need to approach the tax benefits of going offshore with a pinch of salt: You need to see tax reduction as an added benefit – not the ultimate benefit – of going offshore. If you are not careful, your company can be put under the spotlight, 'thanks' due to the negative publicity of offshore company/banking recently.
Takeaway
It is only natural that offshore company is viewed negatively due to the 'unfair' advantages it naturally has – and indeed, some people are just abusing the advantages to doing illegal and/or unethical action, such as tax evasion and money laundering. However, it's only fair to acknowledge what going offshore can offer your business – legally.
If you are interested in going offshore, but are still in doubt on how to approach it, please consult with us for objective views on offshore company formation.
MAR
2015
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