By this time, you have already decided how you can help others doing something you enjoy. You have also figured out the best business model to use to provide your product or service to the customer.
Now it is time to actually create the business. This is a critical step to understand and 98% of new businesses get it completely wrong.
They don’t find out until it is very late in the game and a tax attorney, CPA, business development attorney, accountant or other professional points out their mistake and tells them how much it has cost them.
So the answer is to go to those professionals right now; right? I have to recommend that to protect my own legal rear end. But now that I have recommended that you see your tax professional, accountant or business attorney because that is what I’m supposed to do… I need to tell you that I have always found them completely worthless at the very start.
This is something that I have always had to handle. It is very easy if you understand the basics, so let me explain those basics to you.
What is a business? Under the law it is a person. If you don’t know what I am about to tell you, you will likely end up structuring your business as an alter-ego of yourself. In other words, YOU are your business. This is usually the very worst of the possible options especially if you are a resident of the United States.
In the United States, businesses are sued on average of once every four years. If your business is profitable and has any recorded assets or if your business is simply an alter-ego of yourself and you personally have assets (such as a home or car), you can expect to be sued more often than once every four years. The suits will generally have no merit, but will cost so much to defend that you will end up settling. You will lose your personal assets in this process.
You can also be personally charged with a crime and go to jail for something you couldn’t even imagine was against the law. For instance, it is against the law to refuse to sell to Israel. International shipping costs are prohibitive and customs forms are a real hassle so many businesses refuse to ship international orders at all. It is a smart business decision. However, it is against the law and the penalty carries jail time for individuals who refuse to ship to Israel. If you properly structure your business though and the business commits an obscure crime such as this one, the penalty is generally a fine for the business since a business can’t be jailed unless that business is just an alter-ego of an individual natural person.
So how can we properly structure our business to keep from losing our personal assets in a law suit or going to jail for committing a crime that we had no idea even existed?
Every state in the United States and every country in the world allows for the creation of a business entity that is a separate person under the law. In most states, these legal persons are called “corporations” or “limited liability companies.” In some countries they are called “anonymous societies.” In any case, they become a legal person in the eyes of the courts of the world. You don’t need to create this new legal person in your own state. In fact, that is generally not recommended for an Internet business with no local employees.
Instead, you get to choose which government’s rules are most advantageous for you. You get to pick the tax rate for your company. You get to choose the enter set of laws that will govern your company. That’s pretty cool; right?
Fortunately you don’t have to investigate the laws of every country on earth to make your decision. Others have already done that for you. Most states and countries just don’t have a very attractive set of laws for doing business. So people don’t even consider them.
For instance, in the United States, there are really only three states worth considering. Those states are Nevada, Wyoming and Delaware. Delaware has an excellent set of laws for companies who are traded on the stock exchanges. Most of those companies switched from a different jurisdiction to Delaware right before they went public though so you really don’t even need to think about Delaware for now. Just know that if you ever want to sell stock in your company on the three major exchanges in the United States that you will probably be moving your company’s legal registration to Delaware.
So that leaves Nevada and Wyoming. You can ask any CPA about the relative advantages of each one. Nevada has absolutely no income tax. They make their income from the gambling industry. They also have a very easy to comply with set of very clear laws for corporations. Wyoming has been competing in an attempt to be even more attractive than Nevada. Once you ask your CPA to help you choose between those two states for your corporation or LLC, they will be more equipped to help you. An open ended question about “how should I structure my company” will usually be met with an endless set of questions that you don’t know the answer to yet.
But you don’t even need to register your business in the United States if you are a U.S. resident. In fact, it is usually better not to do that. The United States has some of the most draconian laws that apply to it’s own citizens and residents that simply don’t apply to foreign corporations. The same goes for Europe. If you are an EU citizen or resident, you will often find that the best place to register your corporation will be outside of the EU. Often, Nevada actually ends up being the best choice for an EU resident whereas a U.S. resident should generally avoid registering their Internet based business in the United States for various reasons.
So where would a U.S. resident look? There are 195 some odd countries in the world. How do you find out which countries have the best laws for your Internet business? The Internet is the answer.
Other people have already gone down this track. They have already figured out that 170 of those 195 countries have no interest in being good places to start a corporation. The way you find the other countries is to search the Internet. Just type “incorporate” or “incorporate offshore” into Google and you’ll find dozens of companies who specialize in setting up your Internet business in the right country. They will each list several countries, but you will notice that it is the same 25 countries listed over an over. You will also notice that the advantages for about 20 of those countries are almost exactly the same. Only the cost is different.
The companies who specialize in helping you incorporate in the right jurisdiction will have a paragraph or two describing the advantages of each of the countries where they register companies. Read those paragraphs and narrow it down. Then talk to your CPA and make a decision.
You won’t regret taking this step. The alternative is potentially losing your house and car in a bogus law suit, losing your entire company or spending time in jail. Or more commonly, your tax accountant tells you the great news that you have to write a $60,000 check to the IRS and casually mentions that if you had structured your company correctly from the beginning that you would be paying much less in taxes. In any case, don’t wait until something bad happens before you structure your business correctly. The time to do that is now.