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11December

What is the Best Business Structures For Online Businesses

Business Structure for your Online Company

Finding the best business structure for your business is hard work. Each type of entity has a different form that comes with different regulations and is best suited only for certain businesses. The question then is: what structure is best for me?

There are many different types of business structures to choose from that each will have its own unique blend of liability, tax reduction, privacy, that will reflect the country it is in and the local corporate laws that govern the structure.

In this article, we will focus only on three different types of structures, Sole Proprietorship, Corporation, Limited Liability Companies (LLCs).

What Business Structure Should I use for an Online Business?

Why Online Retail Stores are Perfect Offshore

We generally advocate for offshore company formation structures because they give you more advantages especially for online businesses, or any type of nonlocal company that exists virtually. Local domestic companies really do not make sense if your business is done completely online. Going offshore allows you to take advantage of local laws in other parts of the world that give non-resident business entities room to exist in an environment that are more favorable to enterprise.

While there are is much information online about how to start an online business, there is not, however, much in terms of how to start an online business offshore.

With the recent pandemic, more people are going online than ever before. With travel restricted there has been a huge wave of people looking to conquer online frontiers using foreign companies to their advantage.

For more information on using an offshore company for setting up an offshore Ecommerce store go here.

The Unique Advantages of Foreign Non-Resident Company Structures and Entities

Foreign companies or non-resident companies are simple legal structures that exist outside the borders of a nation-state. This allows governments to give them a special status as non-resident entities. As a non-resident entity, it has the right to exist, just like an individual. And as an individual that exists in a different country it not obligated to pay taxes, just like you are not obligated to pay taxes until you become a resident of the country you live in. Similarly, legal entities exist much like a person and can exist as a non-resident without incurring tax obligations that generally come with incorporating a business locally.

For more information on how to incorporate online and the different forms of online businesses that work well go here.

3 Main Options in Choosing the Best Business Structure For Your Online Business

  1. Sole Proprietorship
  2. Corporation
  3. Limited Liability Company (LLC)

#1. Business Structure: Sole Proprietorship

This single-person business structure is the most popular because it does not require any paperwork or real start-up costs and is a one person setup who is both the director and the shareholder. This type of arrangement is often used for single-person businesses that works for themselves, that engage in providing services to clientele without having to be specifically located in a physical place.

While this type of arrangement is great for any startup it is not likely going to be sufficient for when the business starts picking up and growing, with more money coming in, invoices and taxes to be paid, hiring others to do work, will likely create inefficiencies. However its great for someone just starting out.

Who is this Business Structure for

  • Single-member businesses owners
  • Have little or no start-up capital to get the businesses going
  • Single household tax claims

Liability

Because your business runs under your name all debts are incurred to you as a person as the business has no separate legal entity. This makes the lability very high. If you are sued or if any creditor goes after you you will personally be liable.

Pros
  • Easy to setup
  • Almost no costs and no paperwork
  • Possibility of tax deductibles for setup
Cons
  • No distinction between your personal and business liabilities
  • No ability to have a business bank account
  • Liable for all debts occurred by the businesses

#2. Business Structure: Corporation

A corporation is the most common structure and term that we here and is often used for businesses or individuals who would like to incorporate a separate legal entity that is a separate and distinct entity. This ensures that any debts incurred or liabilities are taken on by the company itself and not the individual. This is most beneficial for an entrepreneur, digital nomad or freelancer who is looking to sell their services online. 

While a domestic corporation that is incorporated in traditional business centers have high startup costs that will likely include auditing, financial reporting, annual meetings, etc.., an offshore business, often called an offshore corporation, offshore company, or International Business Company (IBC) structure exists in a regulatory environment that is much more business-friendly that often comes with little or no reporting and auditing requirements, with simple incorporation processes that are more able to be changed or amended.

Who is the business structure for

  • Digital-based service business
  • Software as a service SAS business
  • Consultancy
  • Digital Marketing Agency
  • Ecommerce

Liability

All liabilities that come with the incorporation of the entity are born by the structure. That means all debts and loans are separate and distinct from personal assets.

Pros
  • Liability protection
  • Can holding profits offshore
  • Raise capital
Cons
  • Requires yearly fees
  • Double taxation

Benefits Offshore Corporation vs Onshore Corporations

  • Tax Advantages (if structured properly)
  • Free yourself of double taxation through treaties
  • Simple incorporation
  • Fewer regulations
  • Freedom to change and amend and move
  • Enhanced privacy 
  • Greater liability and security
  • Minimal reporting and auditing

#3. Business Structure: Limited Liability Company (LLC)

A Limited liability Company (LLC) offers some unique advantages that can not be found as a sole preordered nor as a corporation. A limited liability company allows for more than one individual to exist in a company structure by means of share capital without having liability by any of the members. The structure exists as a pass-through entity whereby the individuals who are part of the entity are taxed individually rather than the structure itself.

In other words, the dividend pass through the structure to the members directly with the structure not incurring any taxation directly. An LLC is a mixture of a corporation and a partnership that gives owners control of the business while at the same time a degree of liability. Limited Liability Companies are enjoyed because there is much less hassle to set up than traditional corporations and are generally speaking more flexible to form and maintain.

Who is the business structure for

  • A project that requires a number of individuals
  • Investment-related projects
  • A business that requires legal separation

Liability

No liabilities as each individual who is apart of the LLC is considered s

Pros
  • Pass-through tax structure
  • Up to 50 members (sometimes even more)
  • No liability and an individual
  • No double taxation
Cons
  • Yearly fees
  • Can be expensive

Benefits Offshore LLC vs Onshore LLC

  • Lower taxes
  • Simple incorporation
  • Business cost reduction
  • Less regulation
  • Enhanced privacy 
  • Asset protection
  • Minimal reporting and auditing

Where Should You Start your Online Business? 

There are many countries around the world that allow you to set up a business as a single person entity. Forming an offshore business structure can be done in dozens of countries around the world. 

Go here to see our list of countries where we incorporate in.

Our top pics are Nevis, Marshall Islands, and Panama. But there are many variations that include in Europe and the United States. Yes that's right. The USA is actually the biggest offshore tax haven in the world! With Delaware and Wyoming leading the way.

Taxation Of Your Online Business Company

The best part about forming an offshore company for an online business is that you can make it tax-free. (in certain specific cases) However, if you are a US resident you still have a tax liability even if your business is incorporated in an overseas country.

The United States taxes worldwide income as opposed to a territorial based taxation system that most of the world practices and you are obliged to report all income that is made worldwide no matter where it exists or where it was made.

If you are a US resident then your tax liability is determined by worldwide income. If you are a US passport holder but reside in a country outside of the U.S. then you are able to have a Foreign Earned Income Exclusion Agreement FEIE that allows upwards of 110,000USD to remain tax-free.

For US passport holders starting an offshore foreign company may still make sense for other reasons, however, you likely will not as much tax savings because of US CFC laws and its taxation system that ties individuals to all corporate structures held overseas.

If you are a resident of a country that has a territorial taxation system, which is most of the world, then you positioned in a better place to take maximum advantage of a foreign company formation as you are only taxed on income that is brought within the country. 

This means that you do not have to pay any taxes on income that is generated outside of the country. The taxes that you do have to pay are on any income or dividend that are brought into the country through the profits that you have accumulated from your online company.

In other words, if I live in the UK for example, and primarily deal with customers overseas, have an IP address that is not located in the UK, then I am only obligated to tax income that is brought within the country. This is usually done by being hired as a contractor by the foreign company whereby monthly payments are sent as earnings onshore to your account within the UK.

Non-Resident Companies Tax Benefits for Non-US Individuals 

The last category of taxation falls for individuals who live outside of the country where they have a passport. For instance, if you are a citizen of the UK but live in Thailand for instance you are not obligated to pay taxes to the UK government because you are deemed a non-resident according to UK tax law (however you must fulfill the obligations that satisfy those conditions). Your tax obligations therefore would be tied with the Thai tax authorities.

What this means is, if you live in a country that has no local taxation ie. a tax haven or a country that has no income tax then not only can your online business profits exist outside of the country tax-free, but you can bring profits into the country without ever being taxed!

It should be noted that tax issues are complex and should be properly sorted by a qualified legal representative before your start. The advice contained within is for explanation only and does not constitute advice that should be acted upon without proper consultation.

Takeaway

Online businesses will only continue to grow as people move online. Having an offshore business structure makes sense for a lot of reasons, does it make sense to you?

Gone are the days of adding an offshore package to your virtual shopping cart.
There are no longer one-size-fits-all offshore solutions.
 
New regulations have radically changed the offshore industry.
Without an offshore legal strategy, you put yourself at risk. 

A Personalised Offshore Plan Makes Sure You Are Protected. 

 

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