How can I deal with the tax issues of setting up an international venture?

I want to start a web-based business that would provide for services which physically take place in multiple US and foreign cities–basically an agency (not an escort service, in case your mind went straight to the gutter). Is there a way to go about setting up the corporation at the beginning of this venture that will help me keep the most money when tax time comes?

I plan to eventually operate in 6-10 countries—where can I get the most straightforward information on the advantages and drawbacks of incorporation off-shore (say Caribbean somewhere), in the US, or in other countries.  What are the obligations of a web-based business to other governments regarding revenue earned on services performed in foreign countries if the payment takes place online but the service takes place on their soil? Do I need an accountant and lawyer in each country, or can I pay the employees as freelancers via the web and let them sort it out with their home country?  Any advice on this general themes would be appreciated. I think I have a great idea, but set-up is daunting!

The Harvard MBA says:

I’m glad you’re not starting an escort service.  I’m afraid that prostitution is largely a luxury good, so it’s a bad time to get into that business!

I am not an accountant or tax attorney, so take all my advice with a grain of salt.  Nonetheless, I do have some specific advice and general principles.

First, the specific advice: Incorporating offshore is probably overkill at this stage.  Yes, guys like Rupert Murdoch do it, but they have armies of lawyers to help.  My guess is that you’re not (yet) a billionaire, and that the overhead of doing a complicated Bermuda holding company isn’t appropriate or economical.

Instead, your best bet is probably setting up shop in a low-cost state such as Nevada, which has no income tax, no capital gains, and no corporate taxes.  There’s a ton of literature out there on how to incorporate inexpensively in the United States.

Now, the general principle: If you ask a real attorney what you need to do to protect yourself, he or she will probably recommend that you find local counsel in the different companies you’ll be operating in, and work up some complicated system of wholly-owned subsidiaries.  Which is just plain crazy.

The sad fact is that attorneys are supposed to reduce risk, but rarely have the judgment to properly assess the cost/benefit tradeoffs of reducing risk.  Spending $50,000 to reduce the chances of being sued from 0.01% to 0.0001% may reduce your chances of being sued by 100X, but it probably ain’t worth it.

Instead, figure out how you can freeride off someone else’s legal expenses.  In your case, I recommend that you set up your contractor relationships through an established player like oDesk.  Presumably since they’ve been in business for years, and haven’t been sued out of existence, they’ve managed to solve the very issues you raise.  And the cost is pretty minimal, something like 10% of what you’re paying your contractors.

On the other side, you can simply use services like PayPal to accept payments.  Again, let eBay pay the freight for teams of lawyers and accountants.  Yeah, it’ll cost a few percentage points, but when you’re starting a company, it’s the fixed costs that’ll kill you, not the variable costs.

The good news is that the set-up really isn’t that daunting.  Alas, if only the same could be said for the challenges of building a successful business!

2 Comments

  1. Roberto Medri
    Posted January 9, 2009 at 11:54 am | Permalink

    Chris,

    prostitution usually fares very well in times of recession, as depressed people seek comfort.

    High-end professionals often extend credit to secure a client that will be valuable when the good times are back (and they usually do).

    Rob

  2. admin
    Posted January 9, 2009 at 3:44 pm | Permalink

    Rob,

    Prostitution has typically been recession-resistant. However, there has been a fundamental change in the parameters of the industry: The Internet.

    The availability of cheap and convenient substitutes has decimated the prostitution industry. Whether it’s casual sex on Craigslist or streaming live porn, you can get your fill of sex for about $10/month.

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