Why incorporate in the US? What about Bermuda and other tax-advantageous countries?


4

Basically, why should one incorporate in the US? I'm interested in three cases:

1 - Most of the revenue and employees are in the US.

2 - Most of the employees are in the US, but the revenues come from various sources, with the US representing say less than 1/2 the total.

3 - Revenues come from various sources, employees are located in part outside the US.

I'm curious as to the activity in and outside the US. For example, to the extent that a US corp is vastly more convenient at least for the US-based activity & revenue (true?), why shouldn't it be owned by a Bermuda-based company, or something similar?

Thanks,

JDelage

Incorporation Legal Tax Localization

asked Mar 25 '11 at 02:41
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J Delage
277 points

3 Answers


7

Much of this is really just advanced common sense.

  1. Customer trust, which either helps or hurts sales. To some extent, seeing a physical company address builds trust with US customers, and perhaps some trust with other nationalities as well. Seeing an address on the Cayman Islands etc reduces trust -- the customer may quite rightly feel that he's at a disadvantage when it comes to warranty claims, credit card refunds etc.
  2. Outside investment. If you plan to or might have to take on US Angel or Venture Capital financing, having your business registered in a tax heaven is most likely a deal breaker. Investment agreements are fairly complex, so to have a lawyer conduct a comprehensive review of the validity & enforceability of these provisions under the tax heaven laws is damn expensive.
  3. Employee trust. See this from the employee's perspective. If you're a US national who has plenty of employment offers, which job would you rather take: The one were you're a regular employee in a US company governed by laws you already know, or the one were you're a consultant to a company located overseas?
to the extent that a US corp is vastly more convenient at least for the US-based activity & revenue (true?),

Yes, that's true.

why shouldn't it be owned by a Bermuda-based company, or something similar?

That is perfectly possible, many multinational companies do more or less this (but typically don't place headquarters in the Bermudas, but fx Switzerland). But it also brings lots of extra accounting work (due to the international subsidiaries), potential legal issues around taxes (transfer pricing ), extra fees to the chartered accountants & lawyers & office staff in multiple countries. And in the end, if the people owning the Bermuda company are US nationals living in the US, they still have to pay US taxes on their income.

My basic advice in this situation remains the same: Don't think about tax planning at first, worry about creating a successful business first. If you're open to changing your location, then move to the area most conducive to getting a company off the ground, i.e. a startup hub.

answered Apr 5 '11 at 20:35
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Jesper Mortensen
15,292 points

2

I think the simple answer for most of this is that when starting a new business you already have enough random paperwork and tax crap to deal with that you don't need to make it any more complicated than it needs to be.

Sure, you might save yourself a couple thousand on taxes by incorporating in Bermuda, but you'll probably spend that right back on additional legal/accounting overhead.

The "where do I incorporate" question is probably not something you should be thinking too much about at the startup stage, but something to think along of the lines of "where should I reincorporate to" once the business has REAL traction and you can make a more informed decision based on where the projections are going.

answered Apr 5 '11 at 22:15
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Brian Karas
3,407 points

1

It's common for corporations to be treated under national tax codes and tax treaties to be treated as resident in the place from which they are controlled (essentially, where board meetings occur) or where the balance of their board are resident. In either case, if it applies to the US, it's going to be more hassle than it's worth.

answered Apr 6 '11 at 22:01
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Marcin
526 points

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