tech-company, legal, taxes, lawyer, globalI want to open a business that offers software development services here in the US with developers out of the country. We will be the same company in each country, but I am not sure how it works legally. Someone suggested me to create two different companies, where one is registered in the United States for sales, and the other is in the other country for development. We’d then make a contract between the two, so it would be easier to file the taxes on the income and expenditures of each business.
I know we probably need a lawyer, but we were wondering whether anyone has any insight or guidance about what we need to do.
For the US company the easiest would be to just deal with a foreign entity, receive invoices for products or services and pay them. Having an invoice from another company be it domestic or foreign should be enough for your accountant to work with.
Unfortunately, I have no comments on the other side of the story as you haven’t mentioned the other country. Different countries have different laws in regards to dealing with US entities.
It can make good sense to set up separate entities for that situation, depending on the desired legal and tax outcome. That’s complicated enough that legal counsel is a good idea.
The ownership question is significant. Are the entities brother-sister? Is one of them the parent? If one is the parent, are there regulatory or funding or securities reasons to make the US company the parent? Are the founders all comfortable making the foreign entity the parent?
Note that two related companies (all the same owners or one company owns the other) entering into a cross-border contract brings up some transfer pricing issues. If you eventually get to be big enough, then it can draw IRS attention. The problem is the obvious “tax hack” available: you could set the contract very high so that the foreign company gets almost all the money from its work and the US company gets little, and therefore declares little US income. If the division seems unreasonable to the IRS, then it may come in and attribute more income to the US entity (including back taxes and possible penalties).
So for tax reasons and legal reasons, you should have a careful process for setting the contract prices. The IRS usually looks to comparable prices from unrelated companies, so if you are twice as expensive as any other company in the foreign country, they might consider that unreasonable. One route is to set up independent committees to negotiate the contract prices, if that seems honest and feasible.
I would try to start your contract pricing off as a startup, even though transfer pricing is often not an audit issue until the dollar amounts are significant.
You’re right that there are many possible ways to structure a business that trades across boundaries, and that tax and legal compliance are often the biggest considerations. It’s also the case that the scale and scope of your operations will give you different optimal answers in general. So what should you do?
Stop worrying about this question. What’s difficult is getting new customers on board. Once you have them, you will need to consider some of the detailed questions, and you will have a stream of income out of which you can pay smart people to give you the answers.
So your first meaningful question is, where is it best for me to incorporate? The answer will usually be, where it’s easiest for my customers. And in service businesses, your life is generally far easier if you are incorporated in your customers’ country, with your service agreements and invoices kept under domestic law.
But then you know in advance you are going to have some legal footprint in the other country where you are fulfilling orders. What do you have to do?
Well, what’s the minimum viable entity? Maybe it’s an oDesk account. If they have done all the hard work to make it possible for developers in the specific international location you have in mind to work for clients in your domestic market, there’s a viable solution - not for all time, but to give you a
In a startup you have to focus on effectiveness, not efficiency. Investing time and effort now in internal decisions you could make later isn’t just a waste, it isn’t just a distraction, it’s pushing away the agility that is your principal advantage.
All content is licensed under CC BY-SA 3.0.