When you should incorporate your new business

Dateline: Ulaanbaatar, Mongolia

Due to money issues, many people like to run their business with themselves as the sole proprietor for as long as they can. They bootstrap their company because they do not have a lot of money and are trying to avoid the financial costs involved in incorporating their business.

By putting off the expense and formal procedures involved in making their company a legal business entity, they think they are saving themselves time and money.

Without counting the business that I started young and subsequently did nothing with, I started my own business when I was nineteen years old, freshly dropped out of school, at a time when I had very little money. As a result, I understand this idea of lifting up your company by yourself in order to save money.

However, this is not a practice I would recommend. While, in theory, it saves you money, making yourself the sole proprietor of your business actually makes you vulnerable to certain things that could end up costing you more time and money in the long run.

It is important to be optimistic about the success of your business and plan for the future of your company by taking the measures that will save you the most time and money over the life of your business. With this in mind, I recommend that you incorporate early for several reasons.

Legal structure of the company

The legal structure of the company involves the logistics of how your business runs. For instance, how are the bank accounts for the business set up? How are the merchant accounts for the business set up? How is everything else set up so that the business functions?

If everything is set up under your own name, moving these accounts later will involve a great deal of work. In addition, sometimes the movement of these accounts can cause issues. For example, sometimes it may be difficult to change from the status of a sole proprietor of a company to an LLC, corporation, or other kind of status.

If you are optimistic about the success of your business, it is worth taking care of this during the business’s infancy to build a solid foundation for it. As time is money in business, building your company right from the beginning will save you both and spare you from troubles that are certainly avoidable.

Saving money through taxes

The second reason I encourage early incorporation of businesses is due to tax reasons.

I frequently encounter people who run their businesses in countries that have high tax rates – like the United State or Australia – and want to move their business to another country to reduce their tax burden. Depending on the type of business that you run, moving your company may not be as easy as simply declaring that you want to move it to an offshore jurisdiction.

Instead, a measure you may end up having to take is selling your company to yourself while you are in the desired offshore jurisdiction. This means it is possible for you to be subject to capital gains tax (CGT), as well as other taxes that you may qualify for.

It is important to set your company up correctly early on. Setting up your company in your name or as the wrong kind of the company in the beginning may subject you to more taxes or costs later on.

Liability of your business

Doing business in your own name opens you up to the possibility of being sued. This is true regardless of what your business sells, even if it is a service or information.

If you are in a country such as the United States, you are vulnerable to being sued, as anyone has the power to sue you for any number of possible reasons.

As a Nomad Capitalist, I always advocate going where you are treated the best. This is where offshore companies can really benefit you.

Setting up your company in a jurisdiction that is more business-friendly will lower the risk of litigation and allow you to protect your assets more effectively. In addition, setting up your company in such an area can save you a lot of money in taxes, assuming the country’s corporate tax rates are lower.

Offshore companies

Setting up your company in the right way and the right location is important. It can save you time, money, and trouble if it is done correctly. Though it may cost some money upfront, setting up an offshore company can provide considerable benefits and is something that anyone starting a business should consider.

Assuming you follow the correct procedures, having an offshore company is perfectly legal. Keep in mind that – depending on your country of citizenship and the country in which you wish to set up your business – you may have to report that you have an offshore company.

If your business is in its infancy, it’s understandable to want to save money, but even with the additional paperwork and potential expenses, you’ll thank yourself for getting off to a good start.

An offshore company in a location that is more business-friendly and in a country with lower corporate taxes could very well give your company the best chance to grow. And by incorporating your business right away, instead of running it as a sole proprietor, you stand to save a lot of money and avoid the issues that come with having all of your assets under your own name, thus allowing you to take your business even further.