Questions about creating a web startup in a tax haven

I am a US citizen and resident and am opening a business selling online services to US customers. The first thing that came to mind when thinking about business / legal concerns is, Why not open it in the Cayman Islands so that I can pay no taxes? I was immediately dissuaded by fears of tax evasion charges, etc. because I didn't know what the laws are pertaining to this. Then, upon browsing answers.onstartups I found some questions and answers that seemed to hint at this not being a problem, legally speaking which has led to much confusion on my part. I hope to solve that cofusion with these questions:

1. Is it legal to own and run a business which is incorporated in the Cayman Islands while I'm a US citizen and resident?
2. Will I gain any tax benefits by doing this, without breaking the law?
3. If I live offshore (become a permanent resident of the Cayman Islands) but am still a US citizen, does this change anything? (ie, can I now avoid paying US taxes, legally?)

Are you planning a new startup or your startup is already profitable?

Unless your startup is printing cash (i.e. highly profitable) and needs a tax shelter, I don't see a reason to set up an offshore business because it takes away your focus from making a profitable product and incur extra expenses.

Lastly, I would leave this complicated question to a highly qualified accountant. After all, this is beyond what most startup founder will go.

I am in the middle of studying for the CPA exam and I have zero experience other then college classes, so this information may be incorrect, but its what I got from my textbooks.

If you set up a corporation in a foreign country, you would need to pay taxes in both that country and in the United States as long as you are a US Citizen. There is an exclusion and a tax credit for the taxes you paid in the foreign country.

The credit is limited to the lessor of:

Foreign Taxes Paid Or

Taxable Income from Foreign Operations/(Taxable Income+Exemptions) x US Tax

 

My advice:
Talk to an experienced CPA about it. I would just stay in the US as its probably less of a struggle to do things. If there really was that big of a benefit to operating your business in these shady countries, why wouldn't every big company do it?

My understanding is that you're required to pay taxes on any money brought back into the US.

So if your startup made $1,000,000 & you pay yourself a salary of $100,000/year and kept the remaining $900,000 in the company's bank account, then you would have to pay taxes on the $100,000 salary. Then $900,000 would not be your money per se, but the entitie's money which would be subject to the taxation authority where the entity was domiciled.

Also, as far as I know, US law doesn't prohibit citizens from owning stock in foreign entities (except maybe country's where there is an embargo in place - e.g. Cuba, N. Korea). Some countries might also have laws regarding what foreign nationals can/cannot own too.

You could probably start by using a domestic entity (corporation or LLC), create a foreign entity later on and then have the foreign entity purchase all of the assets of the domestic company to move everything offshore.

There's really no legal way to avoid taxes entirely. Like Nick said, your best bet is to talk with an accountant to work out a tax strategy that minimizes your tax liability and stays within the bounds of the law. You don't want the IRS thinking that you're trying to stiff them!