Offshore company formation for Startups: What, why, and where

You’ve got a big idea. You’ve researched the market, and you’re sure that your idea has potentials to be turned into reality. You’ve developed a product or service that would answer the market’s need.

Now you’ll have to work hard in ensuring that your startup doesn’t become a statistic (3 of 4 startups failed within the first year of operation, says one resource; 90 percent of them, said another. The bottom line is, most startups failed.) This is where the startup’s game of life begins.

There are things to cover when starting up a business. But there is one issue that’s not much talked about among founders — but they should: Where should the startup be headquartered.

HQ talks matter

Determining your startup’s HQ is essential. Sure, you can just start your business from your garage (just like what Jeff did with his Amazon.) But the time will come for you to take care of the legal matters of your startup.

The first thing to determine is the legal structure of your startup. Typically, an LLC is what’s a startup need, but you need to consult with the legal pros to know whether it’s the most suitable for your business.

After that, enter the talk about HQ. Indeed, determining the jurisdiction of your startup is an important decision — e.g., you need to know how your business will be taxed, and how much.

Different jurisdictions mean different rules: Some products and services aren’t allowed in specific jurisdiction (i.e., Setting up a wine business in Texas will give you huge roadblocks, such as Texas’ infamous wine shipping law.)

HQ location matters

Startups usually are set-up either where the founders live or where the opportunities are more available. While the former is typical, the latter makes sense when you need an infrastructure and community for your products and services — i.e., If you launch a tech startup, going to the Silicon Valley may be a good idea.

Here’s why:

• The talent pool is readily available. In general, setting up a startup in a rural area might not work, unless yours is in the farming sector. It’s hard to find tech guys in a farming region, we believe.
• The community of like-minded people can help each other out — even better, you might find another partner or co-founder for your startup.
• The infrastructure supports your business niche. Using the farming business as an example, it’s easier to find farming supplies and equipment in a farming region.
• Investors know where to look for opportunities. Out-of-place startups are hidden from investors’ sight, and that doesn’t mean a good thing.

Now, this may rarely come across your mind as a startup founder, but there’s an alternative you might want to consider when setting up your company headquarters: Form a company offshore. This is something you should be looking for, especially when your startup serves the global market.

Offshore company formation: What, why, and where

Let’s explore why setting up your HQ offshore is ideal.

What?

Setting up your company offshore means that your startup is headquartered in a jurisdiction that’s not in your home country.

As you may have guessed, this means that the rules and regulations that govern your startup are no longer your home country, but the offshore jurisdiction. You’re taxed based on the offshore jurisdiction’s taxation policies; you’re getting legal protections based on the legal system of the offshore jurisdictions; and so on.

Now, you may think that you need to move overseas for setting up your startup. Well, you can, but you don’t have to if it’s not in your startup’s best interest — e.g., if your startup is in ecommerce sector, and you don’t need to move physically to run it, then you can stay in your home country while doing business as if you’re doing it from an offshore jurisdiction.

Why?

“Why” is a good question, because going offshore for the wrong reasons could be fatal for your startup’s survivability. For example, setting up your company in Bermuda seems like a good idea (no tax, lax laws and regulations, etc.) but when the time comes to deal with big banks and investors, you’ll see that reputation is the actual currency in business and finance world; not many want to deal with a questionable startup headquartered in the Carribean.

There are good reasons your startup may be better off formed offshore:

1. Tax benefits

You don’t want your startup to be taxed unfairly. Setting up a company in a certain offshore jurisdiction may offer you lower tax and fairer tax policies.

2. Asset protection

If your startup was founded in a country with uncertain political and economic climate, chances are, your startup will be impacted by the changing laws and regulations. You don’t want to add more risks to your already risky startup (remember the failure rate mentioned above?)

Some offshore jurisdictions are some of the best in the world for entrepreneurship, with laws and regulations, as well as infrastructures, that are supportive toward foreign investments.

3. Internationalization

Are your co-founders from different countries? Are you planning to market your product overseas? If your startup is started off with multi-national focus, it might be a good idea to embrace internationalization.

Internationalization simply means that your startup is involved in the international markets, which render local rules and regulations (e.g., Taxation) ineffective in coping with the scope of your business. Businesses operating online — e.g., Online store — is the typical business that may benefit greatly from an offshore structure.

Where?

All seems fine and dandy, but where exactly should you set up an offshore company? The answer is a bit cliche: Depending on your plan for your startup.

Switzerland, The United Kingdom, Hong Kong, Singapore, and Delaware — these are some of the best offshore jurisdictions in the world. However, “the best” could mean differently to every company.

For example, if you want to serve the EU market, then Cyprus or Bulgaria can be a good place to start: You can set up a company and bank account without the need to actually present there physically. Importantly, you’ll get an intra-community VAT number, which is a requirement for doing business in the EU.

Another example, if you are a non-U.S. startup — especially if you’re an ecommerce business — setting up your company structure in Delaware, USA or Wyoming, USA may be ideal. Very low (can be zero) corporate income taxes, privacy, and the U.S.’ status as allegedly the strongest offshore jurisdiction in the world are very attractive benefits. You may also want to consider Puerto Rico. As a part of the U.S. territory means that you’ll share the same traits as the U.S., with one exception: You’re taxed using local tax laws, which can be as low as 4 percent vs. the U.S.’ federal tax rate of 39.6 percent; dividends and capital gains are tax-free.

As you can see, there are offshore jurisdictions more suitable for your startup than the others. We recommend for you to seek professional help to devise an offshore plan for your startup; you can consult with us for free for that purpose.

What’s my next step?

Your next step would be to go back to the drawing board and think whether the offshore strategies and tactics would work for your startup, not against it. Although we understand that not many founders create an effective startup roadmap, you should have one especially when setting up offshore structures is critical to your success.

You can register your company yourself or use services like ours to help set it up for you. You may want to consider the latter more than the former, because some of the best offshore jurisdictions only accept company registrations from trusted agents. Not only that, but we can also advise you the best set up for your startup based on our years of experience dealing with companies operating in various niches.