Start-Ups Category

I get at least 2-3 emails a day asking this question one way or another. I figured I could provide a primer in order to do this.

What would be some reasons a foreign company would want to set up shop in the US?

  • Better Taxes – The US currently has a maximum 35% on net income earned in the United States. Even lower on the first $50,000 at 15%
  • More exposure – Some companies need to set up shop in the US in order to manufacture product here, sell on Amazon US, use US based services like Stripe, as well as carry their product in US stores. Some video game developers would prefer to have a better tax situation when selling on Steam, or Xbox Live. Regardless, the extra exposure from having a “US based” company will sometimes far outweigh the costs to do it.
  • Freedom from VAT tax – In the US, you can set up your company in a sales tax free state, and not pay any VAT or Sales tax on sales of products or services, Sales tax in the US is pretty complex and can be different from state to state.

Before I dive deep into this, I want to point out that this is not an inexpensive process, at minimum it will cost around $1,500 to do with a yearly cost of at least $600-700. And that is the minimum. The main reason for this is the legal help that is necessary to set up some of these items (which is unavoidable) as well as the mandatory yearly tax and franchise filings.

OK, first things first:

1) You need a US C-corporation

The reason you will need a C-corporation rather than an LLC (aka partnership) is a that an LLC is usually treated as a “pass-through” entity. This can cause issues if your company in the US makes net income and is required to pass that through to you as an owner in another country. By doing this the The LLC (aka partnership) makes this whole concept of “tax savings” not applicable because you are eventually going to pay tax on any net income from the US in your country.

With that said, if you live in a country with a tax treaty with the US see here, then you can potentially open an LLC and allow that net income to pass through to you in your country and NOT be double taxed. If you are not looking for the tax savings, and you are in a tax treaty country, then it may actually make sense to set up an LLC rather then a C-corp, though this will be rare.

Delaware used to be the place to set up a C-corp or LLC easily, though with increased fees, I find that MONTANA is the best state to set up a C-corp or LLC. This usually costs ~$500 plus $100 per year for a registered agent and annual filing (Delaware is $800 and $300 per year). This process will get you Bylaws, and EIN (business ID number) and Articles of Incorporation.

2) You need a bank account

This is a difficult one, and can take the most time and money to do. In order to open a business bank account in the US you need:

  • a) A registred company, EIN number, and Bylaws that include a corporate resolution
  • b) An officer of the company with a Tax ID number (TIN or SSN)*
  • c) A US based address

* I want to note, that I have heard of some banks which have locations in the foreign country and in the US to allow you to set up a US based account without needing to get a tax ID number. I do not know these banks.

  • a) Setting up your C-corp was accomplished in step 1
  • b) Getting a Tax ID number can be difficult. It must be applied for in a W9 application. You must provide identity and a reason for your application. You can find more about that here. This process can take up to 5 months, so proper planning is absolutely necessary. With the help of a professional, this can cost at minimum $800.
  • c) A US based address should be easy to get, lots of companies provide mail forwarding services.
  • d) Most banks require someone to be “in person” to start the account, unless there is a bank that is also located in your own country (see more below). You will need someone in the US to help. I have not found a bank yet that allows a 100% online opening, and I am pretty sure they don’t exist. You will need to show up with all of your documents, including your passport and a healthy initial deposit. I have worked with a bank that allows this, but there is no guarantee, and I charge a lot to ensure that you are serious about it.
  • e) In today’s global economy, opening an account with a foreign bank that has a branch in the US can be easier than ever. Open an account there to establish that you are reliable and they may allow you to open a bank account for US use as well.

3) You need to do all the proper yearly filings as well as the management of the US based finances

This usually requires the help of a professional.

  • You must file an annual company report with the state and pay any franchise taxes (cost: Montana it is $20)
  • You must pay a registered agent for your company (this cannot be done by me)(cost: $100 per year)
  • You must file a federal tax return (cost: $500+)
  • You must create company minutes detailing an annual meeting of shareholders(cost: none)
  • Annual tax planning – if your company makes income, it may be smart to plan with a professional the tax implications
  • Monthly bookkeeping – a professional can help you with this, but it can be done on your own

4) How to treat that money that is transferred

Any money that is transferred from the US to you or your company in your foreign country is either considered a Dividend distribution, or payment for services performed. Both are most likely taxable in your country. If your county is in a tax treaty with the US (see link above), you may not have to worry about paying tax in the US, this can only be determined by the type of income or payments, a professional can help. If you are NOT in a tax treaty with the US, it may get complicated, and you may need to withhold tax on all transactions, hire a professional.

Conclusion:

There is is! Hopefully that helps, I will try and periodically update this with better and more detailed information.

IRS CIRCULAR 230 DISCLAIMER: Pursuant to regulations governing the practice of attorneys, certified public accountants, enrolled agents, enrolled actuaries and appraisers before the Internal Revenue Service, unless otherwise expressly stated, any U.S. federal or state tax advice in this communication (including attachments) is not intended or written to be used,and cannot be used, by a taxpayer for the purpose of (i) avoiding penalties or taxes that may be imposed under federal or state law or (ii) promoting, marketing or recommending to another party any transaction or tax-related matter(s) addressed herein.

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That’s a great question, and there is no easy answer. This may clarify it a little:

As individual taxpayers Romney and Buffet pay so little in taxes because of two sources of income:

  1. They take qualified dividends from their corporations that they own or are investors in.
  2. They take Capital Gains distributions from investments they have created

For qualified dividends, between 2001 and 2012 they were taxed at 15% (now its 20%), regardless of what tax bracket you were in. Although it seems like a relatively small amount of tax, before any shareholder is able to receive and pay tax on those dividends, the corporation had to pay a tax on that as well (somewhere in the ballpark of 35-40% usually). This is where double taxation occurs. If the company is a foreign company, lets use the Netherlands as an example, they only charge 3-4% taxes on that income, then it gets distributed to Mr Buffet, and he only pays 15%. Heck of a deal.

For capital gains, the maximum rate from 2001-2012 was 15% (now its 23.8%). For investments in a “small business” (a company that has less than 50 million in assets), sale of any stock provides a tax deduction of 50% of that sale, this means that sale is now only taxed at 7.5%… wow. This is why there are so many venture capital firms.

In addition to this, they can also take advantage of investments made in countries with favorable tax laws. Both store a good chunk of their money in overseas, tax favorable bank accounts and investments. Though a slipperly slope for US tax law, many ultra rich investors have many advisors that make it legal. To explain fully would require a whole other blog post.

So as you can see, using those two methods, Buffet and Romney were able to keep their upper tax limit to around 15%, then using deductions, like donations, property taxes, etc, they dropped their tax rates to around 11-12%.

That is only for their individual rates, below is how they win with their corporations:

Huge corporations use a combination of tactics to keep tax low, but the latest and greatest is setting up shop overseas in a “tax haven” country. For example, Ireland made a deal with apple so that they would only charge 3% in taxes on ALL of their worldwide appstore sales. That’s almost a billion dollars in sales a year that they only pay 3% tax on. In comparison, the US would charge 35%.

The research and development credit allows for a very good option too. An example of the extraordinary benefits of the R&S Credit includes the fact that Boeing reported a $20 billion dollar pre-tax income, yet they received a refund from the government of $110 million. Also the new Domestic Production Activity deduction allows a very large deductions as well, most US based companies can access that.

I’ve researched this stuff a lot, mainly because I want to be in the business of offering these options to small businesses and startups, as well as people who may not be as wealthy as Mitt Romney.

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How can a foreign person, not living in (or near) the united states, start and run a Kickstarter Campaign? Here are the basics of how it can be done:

There are many requirements to start a Kickstarter Campaign. Two big ones are to have a US Entity (LLC or Corp) or Social Security number, a US resident, and a US bank account. These two requirements alone would deter quite a few foreigners from trying, you would need someone you knew and trusted in the US to handle that for you. Even then, that person could face tax consequences for running that bank account for you if it is not properly planned (I will cover this in a later post). This leaves very few options to set one up.

A Difficult Solution:

1. First things first, I had to start a corporation so that the foreigner(s) would be the sole shareholder(s): A Delaware Corp is a great idea, they are cheap, provide excellent legal protection, and have a small Franchise Fee for share holders (Typically $225). I can set these up for $550 with a 48 hour rush ($500 without), highly recommended for time constraints of setting up Amazon Payments. I highly recommend you DONT use any of the silly websites that charge you to set up the corporation, they typically charge a mark-up and sometimes yearly fee, most of them do not allow the rush either.

2. Second, I apply for an EIN number – This one is pretty simple and can be done once the Corporation is in place. If you already have a SS# or ITIN you can get an EIN here

3. Next step is to Get a US resident to be part of your team as a “Creator” or “Developer”. This is the tough part. If you are trying to run a Kickstarter campaign, you need to have one. Amazon Payments needs to confirm that your company name listed on the bank account is associated with your US address. Kickstarter also requires this in their own version of verification. The US helper must be available to use their name for Kickstarter. They must be considered a key “creator” in your team. You, as the foreigner can still hold signer privileges on the bank account, but it may be difficult – see below 4. After you get a helper, you need a US based Checking Account To set up a bank account without my help, you need:

  • A tax ID number registered with the IRS. You can get one by filling out and mailing in this form: http://www.irs.gov/pub/irs-pdf/fw7.pdf You will need to provide a physical copy of your passport.
  • Once you get that, find a bank that is located in the US, that has a branch in your country. You must be able to go there in person to set up your signature account. Use your ITIN and EIN number to open the account. Your helper in the US may need to provide documentation supporting this information to a local location. You MUST have a US address on the bank statement, but it can be managed online by you as a foreign person.
  • Some banks such as wells fargo allow a notarized copy of the application and ID to be sent courier as long as your US helper is involved and in person at the bank when the account is set up. Banking laws require bankers to “know” you, which means you must prove to them that you are real and legitimate.
  • I have also heard that some foreign banks, who also have a presence in the US will help you set up a US account without the need for a US helper. I am not sure which banks offer this though.

Or

  • You can have a friend or family member that you trust who lives in the USA (with a SSN) open up a checking account and be an authorized signer on the account for your business.

5. After this process, you may ask: Can I get taxed in the USA for Kickstarter Funds? This is a very complex question, and raises a lot of issues. It is not an easy answer because of the ridiculous complexity of foreign tax laws.

Its a difficult process, and with Kickstarter’s tight guidelines, its a risk to do all of that work and find out that your project does not meet those guidelines. Indiegogo, which offer the exact same service allows pretty much anyone to run a campaign.

**This is not meant to be tax advice, and should not be mistaken for it. It is simply analyzing a potential scenario. Your situation is most likely unique and needs a licensed tax professional to look at it.

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And if your CPA says otherwise, fire them. I have seen two articles already where a Kickstarter video game project says they had to pay taxes on their left over money in their first year, this makes me sad, because you can easily avoid that.

NOTE: There has been some confusion on this article where people seem to think I am suggesting you avoid or evade taxes. That is NOT the case at all. These methods used are 100% legal ways to reduce or postpone taxes paid. I want to be very clear: ALL OF THESE METHODS are 100% legal and are in no way avoiding or evading taxes.

In order to eliminate taxes all together there is a simple accounting rule and election of income that you can use, if that fails (which it wont 99% of the time), then there are a few more complex methods that can not only reduce the tax, but can set yourself up to have a tax benefit to carry over to future years, and should probably be used regardless of your situation.

I will start with the first and most simple method:

Accrual Accounting.

Accrual accounting is an election that is made on a tax return that allows you to claim income when it is earned, rather than when it is received. This means that every video game company (or many others) out there who get Kickstarter funds would not have to pay taxes on those advanced payments until the game is actually made and distributed to those individuals who pre-purchased it.

Going further, let’s just assume that you have given away items such as T-shirts, artwork, and prizes that you distribute to your backers the first year. You would have to include in income up to cost (or fair market value) of those items on your tax return, because technically you did provide a portion of the service and some of that income was technically “earned”. Therefore, you will be responsible for some of the income earned. What’s important to note, is that you will easily be able to offset that income “earned” with the first year’s expenses or the cost of those items (t-shirts, art, etc.).

Simply electing the accrual accounting system is not enough in itself (which anyone can do including individuals, LLCs, Corps), the IRS still requires a special election to classify the income. If that election is not made, the income falls under the rules set in publication 538 (passage in quotes below) and you do not get any benefit from the accrual election, further, you must use the instructions in pub 538 to properly elect the classification on your tax return in order to make that income an “advanced payment”:

“You report an amount in your gross income on the earliest of the following dates.

  • *When you receive payment.
  • When the income amount is due to you.
  • When you earn the income.
  • When title has passed.”

It is important to properly elect to classify this income. I highly recommend a professional handle this for you, as it is easy for someone untrained in taxes to make a mistake with this election. The key to this is to talk to many professionals and ask them if they understand these concepts, as I have seen over and over, most professional do not.

You may also need to file an election to change accounting method, which is dependant on your current situation.

Other Tax Savings Tactics:

Research and Development tax credit

This one I write about all the time, and if you are a video game dev and your accountant has not offered this to you, fire them right now, the benefits are tremendous and could potentially eliminate taxes on income generated from both Kickstarter and sales to the general public. The credit requires some heavy analysis. My firm and many others will not charge until the benefit is used, so it makes complete sense for you to utilize it.

Domestic Production Activity Deduction

This deduction was created in 2004 and was meant to be geared toward the manufacturing industry, then the attorneys over at Electronic Arts successfully lobbied congress and extended it to software and video games. This deduction is 9% of net income, which is an incredible tax break that nearly nobody knows about. For someone that has a net income of $100,000 can easily write off $9,000 as an additional deduction, potentially getting up to $3,000 back in taxes. There are many other requirements to elect this deductions, so again, I advise you to consult a professional with experience utilizing this deduction, not all of them have this skill.

Again, this article is only meant as informational, many individuals and companies have unique situations, I recommend you consult a professional before applying any of the above information.

IRS CIRCULAR 230 DISCLAIMER: Pursuant to regulations governing the practice of attorneys, certified public accountants, enrolled agents, enrolled actuaries and appraisers before the Internal Revenue Service, unless otherwise expressly stated, any U.S. federal or state tax advice in this communication (including attachments) is not intended or written to be used,and cannot be used, by a taxpayer for the purpose of (i) avoiding penalties or taxes that may be imposed under federal or state law or (ii) promoting, marketing or recommending to another party any transaction or tax-related matter(s) addressed herein.

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