Starting a new business is an exciting, yet daunting, adventure! There are so many different variables to consider. Research has shown that about 90% of all startups fail, and more than 20% don’t even make it through the first year.
In order to avoid being yet another failed startup venture, it is essential to make sure that you have considered all aspects of your business strategy. You need to make the optimal choices on multiple fronts to give your business the best chance of success.
One critical decision, which is unfortunately overlooked by many, is the jurisdiction in which to form your new business. Many new business owners simply form their business in the country or state in which they reside.
Few; however, consider the option of forming their startup as an offshore company in a foreign jurisdiction. While this option might not suit every type of new business, it can be a great choice to consider for many new startups.
In this article, we will explore the significant potential advantages of this latter option. We will explain what exactly is meant by an offshore company, why it is worth considering going offshore with your startup business, and the factors to think about when deciding where to incorporate.
What does an Offshore Company For a Startup Business Look Like?
When most people hear the term “offshore”, they associate it with dubious activities to hide money and evade taxes. They think that “offshore” only relates to dodgy tax havens which few have even heard about. In actual fact, this is completely erroneous.
An “offshore company” is simply any company which is formed in a jurisdiction other than the owner’s home country (i.e., in a foreign country). So, if for example you are a citizen and resident of the UK and form a business in the US, you are the owner of an offshore company. Simple.
It is important to note that you do not need to physically move to the country where you decide to form your new business. Depending on the nature of your business, it could be perfectly feasible to remain in your home country and operate it in the offshore jurisdiction you have chosen. This is especially the case with internet-based startups like any form of e-commerce business or online consultancies.
Why Take Your Startup Business Offshore?
The next question you might ask is “why go offshore in the first place?”. This is not such a straightforward one to answer, because there are so many factors and reasons why one might choose to base their business in a foreign jurisdiction. The exact reasons will vary for each business and individual.
In a world with such fierce competition and high failure rates, anything which can be done to give you a small edge is worth considering. Therefore, it makes sense to form your business in the jurisdiction which will give it the greatest benefits and maximise its chance of success.
Startups who have not yet established roots in one particular place, and especially those in the e-commerce/digital sector which are not physically bound by location, would do well to consider going offshore. These companies can effectively choose their jurisdiction based on the various regulatory and other benefits it offers, without having to consider the need to physically be based in any one place in particular.
Here are some of the more popular reasons for choosing to go offshore:
1. Tax Benefits
This is probably the top reason why many seek foreign jurisdictions to form their new business in. The way in which businesses are taxed varies widely from country to country. Favourable offshore jurisdictions offer extremely beneficial tax treatment to offshore companies, which can allow you to significantly lower your taxes if structured in the right way.
2. Asset Protection
Another sound reason for selecting a foreign jurisdiction for your business is if you feel it will provide better stability and protection to your assets. There are countries with much safer economic and political climates which will mean your business is safer too. Furthermore, many popular offshore jurisdictions have rules and regulations which protect the assets in a business from unfair lawsuits, creditor claims, and other risks which you might otherwise be exposed to in your home country.
For those who value a certain level of financial privacy, going offshore can provide a level of confidentiality which is not possible in your home country. There could be many reasons why you might desire this. One simple reason could even be to have an edge over your competitors and avoid people stealing your valuable ideas.
4. International Trade and Investment Opportunities
Incorporating your startup in a foreign country will naturally give you access to international markets and investment opportunities which would not otherwise be available in your home country. This is especially important for businesses with global or multi-national objectives, who want access to specific foreign markets.
5. Access to Better Infrastructure and Skills
Depending on your business’ niche, different places could provide the specific types of infrastructure and skilled human resources that you are after. Rather than just settling for what is on offer in your home country, it makes sense to base your business in a place that will provide the best access to these valuable resources.
Where Should You Form Your Startup?
The logical way to decide the best country in which to form your startup is to do an analysis of which jurisdiction offers the greatest benefits for your particular needs. In doing this, you need to consider what exactly you are hoping to gain by going offshore, and find a country which supports these objectives.
If your business is entirely based online and your goal is purely to reduce or eliminate taxes, you might decide to form your business in a tax haven like Panama or Nevis. If, however, you want a combination of tax benefits along with greater trade opportunities and access to a skilled workforce, you could consider a more established “onshore” jurisdiction like Singapore, Hong Kong, or even the U.S.
Countries For Startup Businesses
A few of the best jurisdictions you could consider for your startup include:
- British Virgin Islands
- Hong Kong
- New Zealand
- United Kingdom
- Isle of Man
- Cayman Islands
- United States
To go into each country individually is beyond the scope of this article, if you would like more information on incorporating as a nonresident see:
Credibility is the Jurisdiction
One vital point to consider, especially for new startups, is the level of credibility that the jurisdiction offers. Unfortunately, many small tax havens which promise a lot in terms of the tax and other benefits they provide, fall short when it comes to global reputability. The fact is that where your business is based on paper can have a massive bearing on your future success. If you are running an e-commerce business which is based in the loosely regulated Liberia, for example, you might struggle to attract the right kinds of investors and customers.
It is for this reason that it often makes much more sense to choose a more established and reputable “onshore” jurisdiction for your offshore company, which offers many of the same advantages of the tax havens, but also comes with an excellent global reputation for international trade and investment. Examples include Scotland, Deleware (USA) Ireland, Singapore, and the United Kingdom. If you do decide to opt for a more traditional “tax haven”, Marshall Islands, Panama, or Nevis is probably your best choice.
How To Setup a Startup Business Online Step-by-Step
- Choose corporate structures and offshore location that has favorable tax laws for non-resident companies
- It is advisable that online companies that deal with taking customer payments use a multi-jurisdictional structure which provides a more secure and efficient setup
- Company A is incorporated in a mid-shore or onshore country that has a sophisticated banking system, good reputation and easy payment processing capabilities
- Customers and clients are billed by Company A whereby the funds are taken in by an offshore corporate account
- Company B is can be the owner/manage as a trust or foundation the company A that is located in a second country
- Transfer of funds from the two structures enables you the benefits of added protection, security and tax-free status on all funds that are held offshore
- Funds are distributed to you as an individual who is hired as a consultant
- You are only taxed on the income that is brought into the country of residence where you live. The rest of the capital can be held offshore until it is repatriated. Although this possibility will be determined by the tax laws of the country where you currently reside
For a more detailed explanation and guide to setting up an online company go here
We have discussed the many sound reasons why you should consider an offshore company for your startup business. As you can see, deciding whether to go ahead with an offshore structure for your business and, more importantly, exactly where and how to structure it, is a vital yet complex decision to make.
It is for this reason that it is highly recommended to enlist the expert guidance of a professional who can help you choose the best location for your business and guide you through the complexities of setting it up. A seemingly small decision like this can have a major impact on your startup’s future, and can ultimately be the difference between failure and success.