The following article was sponsored by Nomad Capitalist
The location independent business has become popular among globally-minded entrepreneurs for a reason: working while traveling the world allows you far greater personal freedom than just staying in one place.
Being born in the United States doesn’t mean you should live there your entire life. If you’re treated better in Poland or Romania or Thailand, it only makes sense to go to the place that you like the best.
I’ve consulted with a lot of location independent entrepreneurs and one of the biggest disconnects that I see is that business owners who choose to live in a place that treats them well often afford the same benefits to their company.
There are some great tax and business strategies that many expats don’t even know about.
If you own an internet business or some other company that allows you to work remotely, there is likely no good reason to have your company based in the United States.
Just as you wouldn’t throw a dart at a map to decide where to live, you shouldn’t just make “the default choice” when it comes to setting up your company. Starting an offshore company is a good idea for many e-commerce, internet, drop shipping, and other global businesses.
The benefits of an offshore company
Here’s the good news: you don’t have to be rich to go offshore, nor does your company have to be huge. Even if you’re not a “baller” yet, you can still take advantage of the benefits of an offshore company without spending a fortune.
I imagine that for many online business owners, the prospect of having a corporation in Hong Kong or Malta or the Cayman Islands seems a little crazy, but it’s no crazier than moving to Thailand for better weather or dating a girl from a different culture.
The barrier to entry to starting an offshore corporation is lower than ever. You can set up an offshore structure in as little as one day, and open a bank account without even leaving your home in some cases.
In my work helping entrepreneurs save on taxes and optimize their business practices, I frequently explain five key benefits of using an overseas business structure over a domestic one.
Whether you are currently doing business as a sole proprietor or you have an existing domestic company, it is possible to move your business operations offshore. Let’s explore five major benefits of doing business offshore.
Reason #1: Tax Benefits*
If you’re reading this, you no doubt already believe that living overseas affords you a much better lifestyle than slaving away in the United States. From the cost of living to personal freedom to dating opportunities, life outside of the US is simply a better option for most of us.
US citizens have the distinct disadvantage of having to pay taxes even if they live in another country. The only “opt out” on paying US taxes is to renounce your citizenship. However, if you already live overseas, you can easily qualify for what is called the Foreign Earned Income Exemption.
In simple terms, the FEIE allows you to exempt just over $100,000 in income from US income taxes each year merely by spending the majority of your time outside of the United States.
If you earn less than $100,000 and do business in your own name, your entire income could be exempt from income tax, but you’d still owe Social Security and Medicare tax of 15.3% on the entire amount.
However, there is a loophole: using an offshore company and paying yourself a salary allows you to exempt yourself from most Social Security taxes as well. Even if you earn $50,000, you could save as much as $7,650 per year if structured correctly. Even when you factor in the cost to get your offshore company started, you’d break even in a matter of months.
But what if you earn more than $100,000 each year? An offshore company can potentially help you save even more money. It’s possible to have your company pay you a salary of $100,000 or less and keep any additional profits as “retained earnings.”
Let’s say you run a drop shipping business that nets $200,000 per year and you outsource some of the work. It would probably be fair to assume that you could hire someone to replace you in that business for a $100,000 salary.
Using that assumption, your offshore company would collect all of your profits and then pay you a salary that was exempt from US income tax. The rest of the money would remain in your company at offshore tax rates as low as 0%.
We had a client earning $500,000 a year in a “Four Hour Workweek” style business that was able to reduce his effective tax burden to almost zero by using this system. Your situation may be a little bit different, but the principle is the same.
Basically, you are in control of how your money is taxed and at what rate.
You’ll note that I titled this section “Tax Benefits*” with an asterisk; while the law is clear, it’s always a good idea to get a review of your specific situation to make sure you stay out of trouble. That’s why I offer to bring in a real US tax lawyer to help all of my US clients.
Going offshore is NOT about breaking any laws or hiding, but rather working within the little-known benefits the law allows.
Reason #2: Greater Control
It’s only natural to think that you should set up your company where you live. And in some cases, that makes sense. For example, I know a lot of business owners in California that start Nevada companies thinking they’ll save on taxes. The reality is that a Nevada company rarely offers the tax benefits people think it does.
If every US business was able to merely set up a Nevada or Delaware corporation and then do business in a high-tax state, there would be no California companies. US companies are subject to US tax law no matter which state they are in.
However, an offshore company offers certain advantages that a domestic company doesn’t. For example, Hong Kong companies allow for much more liberal tax deductions. A US LLC or corporation might not allow you to deduct a fancy dinner for a client, while a Hong Kong company would.
Many offshore companies allow you to invest in assets like real estate that US companies don’t allow for. In this way, you maintain maximum control over your company and keep as much money as possible for yourself.
Reason #3: Asset Protection
One common misconception about offshore companies is that you can live in the United States, run all your money through the British Virgin Islands, and pay zero tax. That’s false; US residents always pay tax on their worldwide income, including from foreign companies.
Unless you run a large company with a lot of employees, the most significant tax benefits of an offshore company are had when you as the owner live outside of the United States.
However, offshore companies offer an additional benefit besides tax savings: asset protection. Most US companies protect your assets like a two-foot-tall mesh fence protects your home from trespassers. In the United States, a new business is sued every few seconds.
Basing your company offshore can protect you from frivolous lawsuits. If you run a business that sells physical products, you may be at risk for being sued at some point. And as you may know, US courts tend to favor teary-eyed plaintiffs over “greedy” business owners.
By incorporating in a country like Nevis, you build a fortress around your assets. Rather than being sued in California where any judge would practically help the plaintiff carry the bags of your money out the courtroom door, you would have to be sued in Nevis where plaintiffs are required to post a $25,000 bond.
Additionally, many offshore jurisdictions require plaintiffs to actually pay their own lawyers in advance as well as pay the legal fees of the party that wins. “Pay only if you win” lawyers don’t exist in these places, which significantly reduces frivolous litigation as well as unnecessary legal costs.
Reason #4: Less red tape
I’ve talked to hundreds of entrepreneurs from the UK to Thailand to Ghana, and almost every business owner with a company in the “first world” has a story about some hassle created by the local government.
From having to keep every receipt, to filing complicated tax returns, to the expense of paying tax, US and European companies come with a lot of hassles. Offshore companies do not have many of these hassles.
Companies in jurisdictions like the British Virgin Islands, Nevis, Belize, and Seychelles, no annual filings are required. You don’t have to keep receipts or file annual reports. That’s not to say you shouldn’t know what’s happening in your company, but at least you won’t have the burden of silly paperwork.
Reasons #5: Global Mindset
If your business only sells to customers in one country, you’re likely missing out on a lot of business. This is another mistake I see many entrepreneurs make: they physically move themselves to somewhere in Southeast Asia but continue to sell to customers in only one country.
No doubt, this business model can be very effective. But when you consider the idea that “there’s always a bull market somewhere,” doing business globally can make a lot of sense.
For example, we’ve found that customers in emerging markets are far less price sensitive than customers in, say, the United States. The best market for your products and services may be one you haven’t cracked yet, and having an offshore company will help you build an even more global mindset.
How to Get Started
I’m not an attorney or an accountant, and all of this is basic advice. It may or may not apply to your specific situation, and I can’t stress enough that you don’t want to go into this without the proper preparation.
I know too many guys who called some shady “lawyer” they found on Google only to be told that setting up a company is “easy” and “tax-free.” And, done correctly, it may be. However, US citizens are at a huge risk for government fines and even jail time if they don’t set up and report their offshore business activities properly.
If you’d like to discuss your business and find ways to legally reduce or eliminate your tax bill and enjoy the other benefits discussed here, I can help you plan a strategy and then do the “dirty work” of implementing a structure.
If you have a small business selling digital products, a simple one-company structure with two bank accounts and an offshore merchant account may be all you need.
If you sell stuff on Amazon, you may need a hybrid structure that involves a domestic company and an offshore company.
And if you run a large enterprise with employees around the globe, chances are you may need a more complicated structure with money moving from country to country.
You’ve seen companies like Google use set-ups like the now-defunct “Double Irish Dutch Sandwich” and Cayman Islands companies to pay very little tax, but the reality is that there are solutions for a small business earning $50,000 per year as well as huge multi-national companies.
Our team is well-versed in the issues US citizens deal with when going offshore. If you’d like to apply for a free consultation, click here to learn more.
Gregory Diehl is a world traveler and lifestyle entrepreneur who splits his time between Kuala Lumpur, Malaysia and Vilcabamba, Ecuador. He can be reached here.