Let us assume that you are a sole proprietor working for yourself and reporting to nobody apart from the fiscal authorities. Let us now assume that you take out a bank loan to expand your business but your supplier lets you down and it turns out that you are unable to pay back the loan. What is going to happen to your property? Correct: the bank will take away everything that belongs to you. Everything: not only your business assets but also your car, your house, your jewelry, and so on. This is because a sole proprietor has unlimited liability, which means that they are liable for their business debts by all their property, not only their business assets.
How can you avoid this situation? By incorporating a company. When you incorporate a company, you do a precious thing indeed: you separate your personal possessions from your business assets. In case your business collapses, no court of law can rule that your personal assets be expropriated towards paying back your company’s debts. Please bear in mind, however, that if you turn your company’s debts into your personal possessions through the use of a fraudulent scheme, they will be expropriated if you are found out.
Where should you incorporate: at home or abroad?
Incorporating at home is simple, of course. Besides, it will require less money as you will probably already have an office where you can have your company’s legal address (every company has to have a legal address: this is mandatory). Besides, the Business Register and the tax inspection are going to be in the vicinity, maybe just on the other side of the road. Registering a company in your home country does not usually take too much time, money, or effort. After all, ‘there is no place like home’ as the popular saying goes.
Registering a company in a foreign country is a more challenging task but it can be highly beneficial in some cases. What benefits can a foreign company bring to you? First of all, you can incorporate a company in a low-tax jurisdiction, which will let you save on taxes. The times of tax havens (zero-tax jurisdictions) are almost gone, but low-tax countries still exist so there are legal opportunities to lessen your tax burden (we would like to emphasize that these opportunities are 100% legal: we are not speaking about evading the taxes). Needless to say, yours has to be a medium- or a large-scale business for the low taxes to compensate for the expenditures that are associated with incorporating and maintaining a company in a foreign country.
The second important advantage of incorporating a company abroad is going to be relevant to you if you have clients/ partners/ suppliers in foreign countries. If you incorporate a company and open a corporate bank account in the country where your buyers live, you will make life much simpler for them. They will not have to make international money transfers anymore! What would that mean for you as a seller? You’ll get more sales! If the payment method is complicated, many people will be reluctant to go through all the hassle and so they will not buy the product. If the payment method is simple (make a couple of clicks and you are done), people will be more prone to making the payment.
What costs are involved in incorporating a company abroad?
Incorporating a company in a foreign country does not come free. To begin with, you may have to hire a registration agent in the country of your choice. You will have to do it if you want to incorporate a company in the USA or in an offshore jurisdiction. Naturally, the agent will charge a fee.
Besides, all countries these days require that your company have some ‘economic substance’ in the country of its incorporation. This means that you will have to purchase some tangible assets in that country that will be written in the name of your company. For example, many countries require that your company have a physical office, not a virtual one. (This said, you might be able to get away with a virtual office in some countries.) In addition to that, you may have to hire some local staff – a company secretary or a local accountant, for instance. And having company personnel means paying salaries. Not much, only a couple hundred dollars per month if you incorporate in an offshore jurisdiction, but it is an expenditure anyway.
As you can see, incorporating a company abroad involves certain costs so you will have to decide if it is worth it or not. In any case, you should seek professional advice on the matter because incorporating a company in a foreign country is an arduous enterprise.
What type of company can you incorporate?
There are several types of companies to incorporate but the most popular form of company ownership in the world is Limited Liability Company. You will understand why this form of company ownership is so popular if you look at its name: the liability of the company is limited. This means that if things go wrong and the company goes bankrupt, only the company’s assets can be expropriated. The company owners’ personal belongings will remain intact.
It is unbelievable how much more adventurous the LLC owner feels having only limited liability! Just think of it: you can take out bank loans and engage in risky business ventures and if you lose, you will only lose your company’s assets and spoil your credit history. At the same time, you will not lose your house or your car. You can even keep your bracelet and your watch!
What makes things even better is the fact that most countries allow LLC incorporation by one person. Yes, you do not have to have any partners to incorporate an LLC.
There are other forms of company ownership too. Those who plan to launch an IPO in the future, often opt for starting a joint stock company. In comparison to an LLC, this type of company is more flexible as far as transfer of ownership rights is concerned.