Over the past few weeks we went over the basics of building a brand. One thing all major(and minor) brands have in common, is that they are protected from a legal perspective. Having a good business structure will give a lot of benefits moving forward. Although the initial set up process can seem overwhelming and expensive, it doesn’t have to be. Nowadays, there are many countries where you can incorporate remotely that provide a lot features, benefits and most importantly in a financially secure jurisdiction.
In the next part of the series we will guide you through everything regarding business incorporation and banking – including some helpful tips on where to incorporate your business.
P.S. This guide is only meant as a resource. While a lot of research has gone into proving helpful and accurate information – We are not lawyers. Before incorporating your business, especially in countries outside of yours, always consult with a qualified professional specialized in international laws & taxation.
Many new business owners and online sellers alike often ask if they should incorporate their business before selling online or do it once they are established and have capital. This all depends on what type of business you run, in our case, what products you’re importing. If you’re importing products of high-risk liability such as:
- Electronics or Electrical Appliances
- Toys & Baby products – and any products used by children ages 3-10
- Cosmetics & Beauty Products
- Food & Drinks
These are all products that need certifications and in some cases lab testing done. If you’re importing as a Private Label(and not an established brand), a corporate structure will offer you an extra layer of protection.
Furthermore, having your business incorporated has numerous advantages which are helpful especially later on when your business grows larger. Some of the benefits include:
Personal Asset Protection
It is very important early on to separate personal assets and business assets. Aside from the initial stage where you have to fund your business, you should immediately get a business account for your transaction. This is crucial not only because some banks won’t allow you to use your personal account for business, but more importantly, having your personal assets separate, will protect you in the unfortunate event your business is liable for damages.
A business corporate structure, such as a Limited Company, will protect your personal assets. This is the main reason what makes incorporation attractive.
In the event of an exit, company shares or members can be transferred. Making it very easy and attractive if you want to sell your company in the future. This is true if you have a Corporation structure, where you own 51% or more of the company, shares can be easily sold or transferred to the new owner.
Depending on the structure and country of incorporation, you might find out that you owe less taxes than self-employed/sole proprietorship. This is due to numerous tax cuts and deductibles offered to business owners. If you qualify, your tax bill can be reduced greatly, as always, consult with a law firm specialized in business incorporation or your CPA on what tax cuts are available in your country or state.
Important: This shouldn’t be confused with tax evasion and it’s by no means condoned. Tax avoidance is allowed only in accordance with the tax laws of the country of incorporation. For this reason, if incorporating in a country different than the one you’re resident in, consult with the tax authorities before proceeding with incorporation.
Separate Credit Rating
Your company will have it’s own credit rating and it won’t be affected if your personal credit score is not good. Keeping a good credit score for you business will give you a lot of benefits, these include:
- Increased overdraft facilities
- Higher Credit Card Limits
- Bank Account Upgrades
- Dedicated Financial Advisor(depends on the bank and account history)
- Reduced or No Account Fees
Having a good history will make your company investor-friendly as investors or potential buyers want a company with few debts or liabilities.
Retirement Plans and Payroll
Having your own company will allow you to create private retirement plans for you and your employees. Depending on the bank, business accounts have payroll management in their system. This will be very helpful if you plan on having employees or contractors.
Disadvantages of Incorporation
Unfortunately, while there are a lot of benefits to business incorporation, this comes with it cons. This is true to small business owners and people with limited capital. Some of the disadvantages are:
A Lot of Paperwork
Registering and maintaining a business comes with a ton of paperwork and filing. This can be very confusing if you’re new or if this is your first company. Each country has it’s own laws and if you’re selling globally, you have to comply with each country.
This can be quite overwhelming, but unfortunately it must be done. To make things easier, have your CPA or lawyer take care of your company filing – that way you have no risk of incurring fines.
Fees! Fees! Fees!
With tons of paperwork, comes tons of fees. Between registration fees, yearly licences, taxes and CPA fees; your outgoing expenses might increase. Maintaining a corporation can become expensive and shouldn’t be done without capital.
Limited companies are popular because the fees are lower and have less filing requirements than corporations. This is the structure that works best for new sellers and those in e-commerce in particular.
Liability Is Not Guaranteed
While incorporating your business may protect your personal assets, you may still be liable in some cases. Only a Corporation fully protects the personal assets of the shareholders. If you import products with high-liability, it’s best to consult with a lawyer on which structure is suitable.
There is a common misconception amongst people outside the USA that incorporating your business in the US is expensive and complicated. Furthermore, in some cases, if you’re importing in the US, you need to have a US company or subsidiary. Some dropshippers in the US will also refuse to work with you unless you have:
- Reseller Licence
- Employer Identification Number
US LLC State Registration
It is recommended to start off with an LLC if you choose to incorporate. For US non-residents the 3 best states to incorporate are:
Delaware State is the most popular place for foreigners who wish to incorporate in the US. However, Delaware is better suited for those wishing to form either an S-Corp or C-Corp.
- State Filing Fee: $200
- Certificate of Formation: $90
- Annual Fees: $300 Alternative Entity Tax by June 1 + State Filing Fees $200 = $500
Home to the popular Las Vegas, Nevada is one of the best states to file an LLC, with it’s very attractive tax rates and ease of filing. Besides the yearly fees, there are no other requirements to follow.
- State Filing Fee: $75
- Annual Fees: Business Licence $200 + Annual List $150 = $350
Wyoming is the cheapest state of the 3 for LLC costs. It offers all the benefits of states like Nevada and formation shouldn’t take longer than a few business days. Foreigners wishing to incorporate in Wyoming, must have a registered agent notifying the state in writing.
- State Filing Fee: $100
- Annual Fees: $100
In all three states you require a Registered Agent. A registered agent is a person or service that acts on your behalf in the state of incorporation. They would receive any letters/paperwork and notify you when paperwork and annual fees are due. Services normally start at around 49$/year and it’s required by law to have a representative in the state of incorporation.
Employer Identification Number
The EIN, is the tax identification for your business. This will be the number used to conduct business inside the US and for importing/exporting goods.
If you’re a US resident or you’re a non-resident, wishing to get an EIN, the process is quite simple, and you can either get the EIN by applying online, phone or by mail. If you’re a US non-resident with a US LLC/Corporation, you will need a responsible party to get the EIN.
To get the EIN you need to fill out Form SS4 and send it to the IRS. Getting an EIN is very simple and fast – the whole process shouldn’t take more than 15-30 minutes and is free of charge.
Getting a Bank Account
If you’re not a US resident, this is the biggest issue you will face. It is extremely difficult and rare to get a US bank account(business or personal) without being physically present. In some cases, there are companies that offer the service of opening a bank account remotely, however, they are expensive. You can also consult with your CPA or lawyer and see if they can open an account for you.
To open a business account in the US, you need:
- EIN & Company Registration Documents
- Business Licence
- Articles of Organization – This is a list of all the members in the company, you should get the documents when you register the company.
- Operation Agreement
Keep in mind that every bank is different and requires different documentation. If you’re a non-resident, inquire beforehand on what documents are needed.
You need an official business address, this is needed to receive company mail and to register for services & marketplaces. A virtual address will notify, forward and even scan your mail – There are numerous companies offering these services for as little as $90/year.
If you’re registering a US LLC as a United States Non-Resident, you need a US phone number. This is will be required by all businesses(including banks) and marketplaces you will deal with.
The easiest and best option is to simply get a Skype number, it is fairly cheap with low call rates. If you’re based in the US, it is recommended to get a business phone number.
This has been a brief introduction on business incorporation. In the upcoming weeks we will explore Offshore Company Registration – including the best countries where you can incorporate, and business banking. Hopefully, after reading this guide, the incorporation process has become easier to understand.
If you want us to include a particular topic regarding business incorporation or if you have any questions on the subject, please leave a comment below.
All the best & Happy Selling,