The Importance of Running Your Business in a Business-like Way

I have been practicing law for over 25 years and the attitude I have seen that most disturbs me is that running your business is a chore that the business owner should not have to do. I have seen this attitude gaining ground over the last few years among a group of young entrepreneurs calling themselves ‘digital nomads’.

This is one of the biggest mistakes you can make!

When you start a business you are going to have to do a lot of things that may have nothing to do with what you consider is your business. You are going to need to keep a good set of books so that you know how much money you are making, what are your costs, who owes you money, who do you owe money to, how much do you have to pay in taxes, etc. You should sit down and understand what is the best type of business entity for you to use to operate your business. You should try to understand the risks you are going to face. Can someone sue you? For what? Who might that be? Will it be your clients, yours suppliers, your partners, your family, total strangers? Will you have to sue them? What type of contracts are you going to need? How can you manage all that risk so that you do not lose everything you are working for?

If these are questions you do not want to think about, I advise you to do one of two things:

1. Do not start a business and instead go to work for someone who is willing to do all that stuff, or

2. Find a partner who will handle all that dreary ‘non-sense’ for you. (And if you choose to pursue this option be prepared to have your partner remove you at some point from the business since you will most likely be expendable.)

You see all that annoying stuff is your job as a business owner. It is what you are supposed to do. If you do not do it who will?

Take for example a plumber. You may think that the job of a plumber is to fix people’s plumbing. Hopefully the plumber knows better. If he is working for himself, that is if he is operating a business, his job is to do all that annoying stuff to make sure he does not get into trouble while fixing people’s plumbing, and so that he can make the most money he can.

If all he does is fixes people’s plumbing, no matter how good a plumber he may be, it is just a matter of time before he goes out of business. The real money to be made in operating a plumbing business is not in doing the plumbing. The real money is in managing the business. That is why successful business people make more money than employees!

If you do not want to manage your business, then go work for someone else who does. Do not begrudge them the profit they make managing the business. You do not deserve the money that is made by the business person who is doing all the crap that you do not want to do. Not only do you not deserve the profits from the business, you might very well be happier not having to deal with the problems that come with owning and operating a business.

Let us go back to our plumber. Obviously he became a plumber because he liked that trade, and he thought he would make money doing it. But the truth of the matter is that the hardest part of operating a plumbing business is not the plumbing work… it is everything else. If he is running everything else and does not have the time to do all the plumbing work he can hire another plumber to help him out from time to time. In fact as the business grows he may end up doing no plumbing at all and hiring plumbers to do the work as employees. Who is going to make the most money? The plumbers he hires or him – the guy who owns and operates the business? If he is doing a good job operating his business it is going to be him.

So when I talk to potential clients who resist doing simple things like setting up a proper accounting system, I am forced to ask them, “Why are you going into business?”

To make money? Obviously not. If you do not want to operate your business with a basic accounting system you have no interest in money. That is what accounting is all about; managing the money of the business. If you do not want to do that, then go work for someone else. I suspect you will make more money working for a competent business owner than trying to operate your own business.

The same thing goes for setting up the proper business entity, preparing the proper contracts between you and your partners, clients, suppliers, etc. If this is all too much of a bother for you then being in business is too much of a bother for you. That is what operating a business is all about!

I know there are some people who for one reason or another cannot work for other people, and cannot do all the tedious work of operating a business. What should such people do? I advise them to look hard in the mirror and accept the two problems they have:

1. You cannot work for other people.

2. You cannot operate a business on your own.

In both of these cases I would advise seeking psychological counseling of some kind, especially for problem number 1. Perhaps you can find out why you cannot work for other people, identify the cause and find a solution. Although psychologists are the usual go-to profession for solving such problems, perhaps there are other people you can turn to: family, friends, business associates, business mentors, business consultants and coaches, etc. Just understand these later people may not have the training or the interest in helping you solve your problem. If and when you are able to solve this problem you may find it much easier to resolve other business related issues.

As for problem number 2, in additional to resolving your psychological issues you may be able to find someone who is both trustworthy and competent enough to manage the business while allowing you to do whatever it is that you believe you are doing that adds value to the business. Most of the time this is done by bringing the person in as a partner, or it might also work if you hire someone to manage your business and pay them enough to make it in their interest to do so honestly.

Beware! As I mentioned above the person who manages the business is the real business owner. If you delegate all the responsibilities of operating the business without fully understanding what those responsibilities are then eventually you will become redundant. It is always easier to find someone to do the work than it is to find someone to manage the business. If you are ‘in business’ that is YOUR JOB! If you completely abandon that part of your responsibility whoever is doing it will end up being the owner.

Owning and operating a business is one of the hardest things anyone can do. The idea that you can be successful at that without training, experience or even interest in learning how to do so is ridiculous. Don’t do it!

A Very PRIVATE Model for E-Commerce in the USA!

Yesterday, I was talking to a prospective client from Israel who owns and operates an E-Commerce store, and wanted to know how would be the best way to set it up. He does not live in the USA, does not maintain any facilities in the USA, and drop ships everything that is purchased directly from service providers in Asia. He needed a way to accept online payments from customers.

There are two issues here:

  1. How to best obtain merchant account services so that you can easily accept payments using the primary online payment systems: PayPal, Stripe, and Shopify.
  2. How to best reduce taxes without getting into any trouble with your home country’s tax authority.

In the case of an Israeli there are a lot of problems. There are few countries with a more demanding tax system than Israel. The taxes are high, and the rules are very complicated.

Let us begin with Issue #1 above. In the past I would have suggested that the client simply establish a US LLC that will be treated as a ‘disregarded’ or ‘pass through’ tax entity. What this means is that the IRS does not recognize the existence of the company for tax purposes, but instead looks to the actual owner(s). If you are a non-citizen and a non-resident of the USA this can be very advantageous! In the case of this prospective client such a structure would mean he could set up a bank account in the USA for the US company, and not owe any taxes in the USA since he was not earning any “effectively connected US source income”. Also, in the past it would have been very easy to register such a company with PayPal, Stripe or Shopify.

PROBLEM: It is no longer easy to setup PayPal, Stripe or Shopify using a ‘disregarded’ US LLC. For more information on this [CLICK HERE].

There is still no taxes due for a ‘disregarded’ LLC, and it is still possible to open a bank account such a company. However, the US now requires the ‘payors’ (PayPal, Stripe or Shopify) to  maintain such complicated records on these type of companies, and has placed such high penalties upon them if they make any mistake that most ‘payors’ have decided to discontinue servicing such ‘disregarded’ LLCs, and instead require that the company be a ‘taxable’ entity that only requires a simple W-9 form that can be filled out and executed online in a matter of minutes.

If your only interest is in solving Issue #1 then the solution is easy. Establish a company in the USA that will be a ‘taxable’ entity that can quickly and easily fill out an online W-9. I would suggest using an LLC and elect to have the company treated as a ‘taxable association’ rather than a ‘disregarded entity’. Avoid setting up a corporation as that is more complicated to establish, manage, and deal with the taxes. In this way you get all the management benefits of using an LLC while still getting treated like a C Corporation.

Here is where Issue #2 might comes in.

If an Israeli sets up a foreign company he must pay the same taxes on that company as if it were established in Israel. In the USA the tax rate for a C Corporation (or an LLC treated as a ‘taxable association’) is 15% to 21%. Let’s just say 21% to make the math easy. Because there is a tax treaty between the USA and Israel the client would pay 21% in taxes to the USA, and an additional 3% in taxes to Israel because the corporate tax rate in Israel is 24%. Other than having to file two tax returns in different countries, I suppose that is not so bad. However, tax laws in Israel are more complicated than that.

Let’s say that the client wants to take a very small salary and reinvest the rest into the company… or perhaps even just let the money sit there. That could get him into trouble. The Israeli government wants you to behave in a manner that results in the maximum amount of possible taxation. So he may be required to pay personal taxes on all the net profits of the company whether or not he takes those profits as a salary or profit distribution. Personal tax rates in Israel are extremely high!

OUCH!

So is there a solution?

Yes. The Israeli government is not going to like this, but there is nothing they can do about. It is legal.

To help with Issue #2, reducing the taxes for the client, instead of setting up one company that is owned by the client, we instead setup two companies that are NOT owned by the client.

Company Number 1, from now on the Taxable Company, will be owned by a someone other than client. It will be the company that operates the E-Commerce Store, and pays any taxes that may be due. Other than ownership it will be just the same as the above company. The client will receive a salary from this company sufficient to satisfy his basic needs. The rest of the revenue of the company will go primarily to two expense items:

  1. Costs of operations (transaction costs, professional fees, etc.), and
  2. Cost of goods or cost of sales (wholesale price of goods to be sold).

Company Number 2, from now on the Non-Taxable Company, will be owned by an International Privacy Trust that the client can take over at any time, but does not own now. This company will be acting as a middle man, buying the goods from the Asian service provider and drop shipping them directly to the buyers.

The Taxable Company receives the payments from the buyers, and pays the Non-Taxable Company the reasonable wholesale price for the goods.

Example: Taxable Company sells a widget to Buyer for $100 USD. Taxable Company pays a reasonable wholesale price to the Non-Taxable Company of $70 USD. That will leave $30 USD in the Taxable Company to cover operating expenses and the salary for the client. The actual cost of the item was only $20 USD so the remaining profit of $50 USD in the Non-Taxable Company is tax free. (These numbers may change for different situations — it will depend upon the costs of goods, the margin of profits, and the requirement of the client for a monthly salary.)

NOTE: In this case it is very important that the client understand the real costs involved and how much he is going to need as a salary because he does not want to touch the money that accumulates in the Non-Taxable Company until later. I will explain this further on.

This system is a little bit more complicated to setup and perhaps to understand, but once in place it will be much easier to run on a day to day basis because there will be only one tax return that needs to be filed for the Taxable Company, not two.

Above I mentioned how the profits that pile up in the Non-Taxable Company are not touched by the client, at least not until the right time. This is because the client is an Israeli, and again Israel is a much more complicated country than most.

The treatment of the Taxable Company is simple and easy. The client does not own the company, and as such there is no requirement to deal with the added Israeli tax issues.

The issue of the Non-Taxable Company is not so clear. It is a grey area. The client does not own the Non-Taxable Company, a trust owns it. The client has an option to take over the trust, and thus the Non-Taxable Company at any time, but until he executes that option it is not his company. He is not taking any of the money from that company. He is not benefiting in any way whatsoever.

You may ask: Why in the World would you want to do that????

REASON: Israel has a policy of granting ‘one time’ Tax Forgiveness for Israelis who have money offshore and then bring the money into Israel. Usually there is a one time tax of 10%, any tax violations are forgiven, and the money is now in Israel free and clear. These Tax Forgiveness programs take place about every 2 to 3 years.

That is why the profits that the Non-Taxable Company makes must remain in the Non-Taxable Company… at least until the next Tax Forgiveness program is announced.

WARNING: I believe this system is legal in Israel, but I would not suggest you to go to the Israeli tax authorities and ask them for their opinion. In this case it is much easier (and safer) to ask for forgiveness than for permission. If you ask them, I suspect they are going to decide that what you are doing is illegal, and require you to submit all the funds to Israeli taxation. You might win in Israeli tax court, but it might take years and a lot of legal fees. I would not suggest you do this. Keep it simple: Company Number 1 is not owned by you, is a US company that pays US taxes, and pays you a generous salary. Company Number 2 is a wholesaler that Company Number 1 uses as a middle man. It is really none of your business what they do. Then when there is enough money in Company Number 2, and a Tax Forgiveness program is announced, you then declare the money and pay the 10% tax, and get a blanket forgiveness for whatever happened in the past.

For non-Israelis it might be a bit easier to access the funds in the Non-Taxable Company. It will just depend upon the client’s citizenship and residence status.


REAL LIFE EXAMPLE:

Taxable Company

  • Annual Sales for Taxable Company: $2,000,000 USD
  • Annual Cost of Sales: $1,400,000 USD
  • Annual Corporate Operating Costs: $100,000 – $200,000 USD
  • Annual Salary to Client: $300,000 USD
  • Annual Taxable Income for Taxable Company: $100,000 USD
  • Annual US Corporate Income tax (about): $21,000 USD.

Non-Taxable Company

  • Annual Sales for Non-Taxable Company: $1,400,000 USD
  • Annual Cost of Sales: $400,000 USD
  • Annual Corporate Operating Costs (will vary): $25,000 – $50,000 USD
  • Annual Income for Non-Taxable Company: $950,000 USD
  • Annual Income Tax for Non-Taxable Company: $0.00 USD

I suppose you could say that the above $950,000 USD is tax free, but I prefer to think of it as tax deferred. Eventually, you are going to pay taxes on it, but at a time and circumstance that results in less tax not more.

FOR MORE INFORMATION ON THE US LLC [CLICK HERE].

Royalty Financing – Misunderstood or Mysterious?

There are three ways that a business can finance its operations and development:

  • Debt
  • Equity
  • Royalty

The first two are the most common and the easiest to understand.

Debt financing simply means borrowing money without giving up actual ownership of any assets. Often lenders will require some kind of security interest or lien against those assets, but as long as you pay your debt properly you do not give up any of your business, your assets, or your revenue.

Equity financing is the process of raising capital by selling shares or ownership interest in your business. How this actually takes place will vary according to the size and strength of the company brand and finances. An established company finds it much easier to issue shares than a start up venture. Start up ventures often have to give up majority control of their company in order to receive funding from Venture Capitalists.

So what is Royalty Financing?

Royalty Financing is often referred to as a “new concept” in investing, however, this is not really true. Royalties have been around for quite a long time. Royalties are what someone receives in exchange for allowing a business to use some kind of valuable asset, or in some cases just money. The most traditional form of royalties usually involve some form of intellectual property such as music, books, or other artistic endeavors which the artist licenses to the company in exchange for a fixed percentage of the sales. Royalties are also very common in regards to licensing of scientific properties such as patents and designs. The royalty can be compared to a sales commission, only the receiver of the royalty does not have to perform any additional tasks to receive the payment.

What is somewhat novel is the idea that investors can receive royalties from the sale of a product or service in exchange for a fixed investment that is often used to further develop the business opportunity. The most common means of royalty financing is to give the investor a fixed percentage of the revenue of the business or the revenue from the sales of a specific line of products or services.

There are many advantages to a royalty financing arrangement:

  • The most obvious advantage for the business is the fact that the company remains in control of its own destiny while facing fewer risks associated with borrowing money.
  • Easier regulatory environment. Since no shares in the company are being sold securities regulations should not apply.
  • It can also be easier to obtain royalty financing when future revenues are predictable and consistent even if other factors may be more risky.
  • Royalty financing is more flexible than equity or debt financing since the royalty payments will vary according to the revenue rather than upon some preset fixed amount. In good years royalty holders will receive higher payments, and in bad years lower payments. This gives the company the ability to better withstand the possibility of future downturns while giving the investors greater opportunities to participate in the upturns that may occur.
  • Royalty payments are usually tax deductible from the company’s gross income thus lowering the company’s tax liabilities, and also avoiding the double taxation that often occurs with dividend or profit sharing payments.
  • Because the company does not have to give up equity in order to obtain financing, the company can often focus more on operations, and less upon exit strategies of the founders and initial investors.
  • Finally, royalty payments are more secure for the investors since the payments are based upon a percentage of the gross sales or revenue rather than profits. Even if the company is unprofitable, if it makes any sales the investors will receive the benefit. It is also much more difficult to use obscure accounting methods to conceal, reduce, or eliminate a company’s gross revenues than profits.

Royalty financing is not ideal for every business. Businesses that lack predictable and consistent future revenues will find it very difficult to successfully obtain such financing. Also, royalty financing may turn out to be more expensive than equity or debt financing, even if it is more flexible for the company and more secure for the investors.

Sometimes royalty financing is misunderstood, but it is never a mystery. It is just a very convenient way for some businesses to attract financing that would otherwise be difficult or impossible to obtain otherwise.


How to Operate a US Based E-Commerce Business from Outside the USA and Save a Lot of Money!

For the past 15 years I have been promoting the USA as the ultimate banking solution for non-residents (or as some might say a “Tax Haven”). My traditional proposal was to set up a US LLC, take the default election of ‘disregarded entity’ (a “disregarded entity” is an LLC that is treated by the Internal Revenue Service as a complete pass through entity. For tax purposes it does not exist. For all other purposes it does.), open a bank account, and as long as you are not earning any US Source/Effectively Connected Income, you are fine. No need to file tax returns let alone pay any taxes.

That is no longer universally appropriate. FATCA has not changed the tax treatment issues, but has changed the reporting requirements for US payors such as PayPal, Amazon, Shopify, Stripe, etc. The issue of the W-9 (reporting form for US resident payees receiving funds) and W-8Ben (reporting form(s) for non-US residents receiving funds) was always a little murky but now it is downright impossible. Non-residents receiving payments from US payors, even if the funds are “not effectively connected” to US income, are now facing serious problems. No one really understands how the new W-8Ben system works since they have replaced the one form with 4 or 5 related forms that no one really knows how to use. The payors face serious penalties if they get it wrong. So most payors have decided to refuse to open accounts for anyone who cannot execute a W-9. Again, only taxable individuals and entities can issue a W-9.

Because of this it has become very difficult for non-residents to use their US bank accounts to receive funds from US payors. That means setting up accounts with PayPal, Stripe, Amazon, Shopify, etc. will be impossible with a US LLC treated as a ‘disregarded entity’.

Our solutions:

For those non-residents who do not need to receive funds from US payors, the Disregarded LLC is still fine. Nothing to worry about.

For those receiving money from US payors, we need a more sophisticated structure. We will establish a US LLC which then elects to be a ‘taxable association’ (that is an entity that will be taxed separately like a C Corporation). This Taxable US LLC will act as a Payment Agent for a non-resident business with a written agency agreement to resell non-resident goods and services in the USA. 90% percent of the gross income goes to the foreign provider (with appropriate W-8Ben — that will be very easy), and all operating expenses will come out of the 10% agency fee — there should be little or no taxes. A second US LLC can be established to act as a ‘disregarded entity’, and the funds can go from the Taxable US LLC to this Non-Taxable US LLC.

This solution is simple and easy to implement. In fact old Disregarded LLCs can be converted to “Taxable Association” LLCs with little effort. Another alternative is to set up a second US LLC to be the Payment Agent that then transfers the 90% to the original company.

The only downside is that there is now a requirement to file an annual tax return for the Taxable US LLC which means there is a requirement to maintain a good set of books so that the tax preparer can accurately file the tax return. There may be little or no taxes due, but failure to file a tax return can cause a lot of problems. I have always advised my clients to maintain a set of books for professional reasons, but they were not required for US tax purposes. Now they are.

So although it is not as easy as it used to be, it is still very easy.

For new clients this is the solution:

Company 1 is a US LLC electing to be a ‘taxable association’; a Taxable US LLC.

Company 2 is a US LLC electing to be a ‘disregarded entity’; a Non-Taxable US LLC.

Company 1 accepts payments on behalf of Company 2 for goods or services through Paypal, Amazon, Shopify, Stripe, etc., receives a modest commission which is used to pay transactions costs and company fees, and then pays a modest corporate tax that will probably never go above 15% of the net income.

There are of course other more complicated options that might be useful for some clients, but for most this is all that will ever be needed to setup and operate your e-commerce business in the United States of America.

A Nevada LLC Should Not Be Blindly Trusted… Nothing Should

Some bad news for those who think Nevada is some sort of Magical Talisman against creditors:
 
“This Opinion once again illustrates, as have so many similar opinions before it, that it is not nearly enough that a person set up a labyrinth of legal structures to protect themselves, but that for the legal structures to hold up against creditors they must be respected as such. Here, the debtor set up a complicated structure that might normally have put off creditors, but then treated the structure willy-nilly, transferred assets around with little or no purpose or documentation, and then also — the Mortal Sin in creditor-debtor law from time immemorial — personally used and benefitted from the very assets that he claimed were not his.
 
We also again see the implicit application of the ancient legal maxim of delicatus debitor est odiosus in lege, which is translated as “the extravagant debtor is condemned in the eyes of the law”. In other words, a debtor who continues to live a wealthy lifestyle should get no sympathy from the court. So it is here, another case where the debtor claims that he has no money with which to pay their creditors, but maintains a wealthy lifestyle including the use of residences in both in Las Vegas and Southern California. Is it really any wonder that the courts frequently go out of their way to slam such debtors? Not paying one’s debtors while living it up is not only flipping The Bird to creditors, but is also doing the same thing to the Court which has an interest in seeing that judgments are enforced. Why do debtors have such a hard time seeing that?
 
The problem is fundamentally one of clients (1) having some common sense and knowing when they should live an austere lifestyle, and (2) being able to actually follow the legal structure that was created for them. An attorney can create the very best asset protection structure for a client, but if the client then starts ignoring the structure and treating all the assets as his own, then good luck defending that.”
 
Another problem with Nevada noted in the article: Nevada has a very thin record of court rulings compared with other states, and as a result tends to favor California law in the absence of Nevada decisions. This is never a good thing.
 

How a US LLC can Uniquely Benefit a UK Resident

A prospective client approached me recently regarding the benefits of establishing a US Limited Liability Company (US LLC), becoming a non-resident of the UK, and in which order should he proceed. Due to the unique status of how the UK interprets US LLC status, residents of the UK can receive some very unique benefits if they neither incur US or UK “effectively connected income”. This was my answer:

Well I first must fully agree with you about non-res status. It can be a real deal changer. However, in your case it is not absolutely necessary, and I would feel free to proceed with a company formation prior to actually leaving the UK.

If you own a US LLC it will be treated very oddly because of the way that the US and the UK deal with how US LLCs are treated for tax purposes.

In the USA the default setting of the US LLC is “disregarded entity” which means it does not exist for US tax purposes. So if you do not live in the USA and you do not earn “effectively connect US source income” then you will owe no US taxes. In fact you will not even have to file tax returns. This will be the case even if you have a US bank account and do all your banking in the USA. Just receiving money in the USA, even if that money comes from US sources, does not create a tax liability. For that you need to do more; make things, store things, deliver things, maintain permanent offices and staff, etc. from inside the USA.

Now that all sounds pretty good! However, it only gets better for citizens of the UK. Even though the US considers the US LLC to be a “disregarded entity” the UK treats the US LLC as a separate entity. If the US LLC does no business in the UK and incurs no income in the UK then there will be no UK taxes due from the income earned by the US LLC. Now you will need to pay taxes on income you receive as a salary or profit distribution, but you will be able to provide yourself with many tax free benefits since the US LLC will have no taxes to pay anywhere. Money you do not distribute to yourself, or use for your personal benefit will be deferred taxation allowing you to further invest that money. Now it is wise to be careful about how you give yourself these “tax free benefits” since the UK may decide that what you are really doing is giving yourself income and then fraudulently evading taxes; not good. So don’t be greedy. If you are receiving real economic benefits while living in the UK then pay taxes on that income. Keep in mind that you get to choose how you get paid and can select the method with the least tax; profit distributions, salary, reimbursement for contract work, etc. You get to choose whatever is best for you, but again don’t be greedy.

This takes us to the interesting issue of how to really avoid UK taxes. Move out of the UK. I am not a UK attorney, and I do not even pretend to play one on TV, but it is my understanding that in order to gain full non-resident status you must do more than just leave the UK and stay out a certain number of days. You must also obtain a legal residency in some other country. In this regard there are a lot of interesting options out there.

I chose the Republic of Georgia for a number of reasons. For me it was mostly lifestyle issues and economic opportunities, but there are also a lot of tax benefits to be had here. Getting a residency is simple and easy, and it can lead to citizenship for some in under a year! I don’t know of any place else on earth where that is possible without some sort of ancestral claim or a huge investment in the country; at least not a country that I would actually want to be part of.

Some other interesting options that provide great tax benefits: Montenegro, Mexico, Malta, Latvia, etc. Each has its advantages and its disadvantages. Note, you do not necessarily have to live in the country that you have a residency. It might just be a legal formality so that you can claim non-res status. On the other hand it might be nice to combine the issue of tax status and where you like to live.

The Most Important Thing We Don’t Want to Think About: Asset Protection

14915380_605027526288899_4904488283081663198_nWhat an important topic! But sadly one that elicits so little interest!

I have been practicing law for about 25 years, and I have sadly concluded that people will not pay attention to asset protection issues until they lose everything they have, or they get pretty close to it and are scared. Fear seems to be the only motivation for asset protection planning. Sadly I must admit to suffering from this same problem myself when I was younger.

I was recently asked what is the most common mistake in Asset Protection?

My Answer:

Thinking nothing bad will ever happen to you and doing nothing.

There are so many good strategies out there. But you actually have to do something before they sue you, or you get the service of divorce papers, etc. I find people don’t like to think about depressing things. Thus they fail to prepare for them.

I like to consider myself a stoic (not the kind that stands around in hair shirts and such), and one of the lessons is to consider all the things that can go wrong in your life without getting hysterical about it. It helps you to prioritize and prepare.

Some good reading:

Investing Opportunities in the Republic of Georgia

14915380_605027526288899_4904488283081663198_nI have now lived in the Republic of Georgia for over a year. When I first got here I believed 3 things:

  1. It is a great place to live,
  2. It is a great place to invest, and
  3. It is a great place to start and run a local business.

Well 2 out of 3 is not bad. Georgia is a great place to live and invest. Running a local business here is problematic. The rules are great, and the authorities are eager, but things are constantly changing. Very hard to deal with a system where the rules essentially do not exist because they are always being changed. I am hoping that after the recent parliamentary elections things will calm down a bit.

But there are great investments available. For as little as $10,000 you can get a darned good rate on a 1 year CD in USD or other foreign currencies (7% to 8%). For a bit more you can negotiate a higher rate, or you can take the risk of the Georgian Lari and get 12% to 13%.

If you want to invest in real estate there are a lot of short term flipping opportunities due to how Georgians must finance apartment construction. In short there is no financing; everything has to be self-financed. So as a nice project is coming to completion the builder is usually looking to sell apartments at a substantial discount. I have a few of those in the works and I expect to get a quick 20% ROI. If you are ever interested in checking it out get in touch with me. I have some nice apartments I am renting out! 😉

An interesting article on Georgia confirming my own opinion (we all like that!): http://www.valuewalk.com/2016/11/incredible-opportunities-hidden-corner-world/ 

“Disregarded Entity” vs “Taxable Association”: What is the best way to structure your LLC?

For the past 15 years I have been promoting the USA as the ultimate banking solution for non-residents (or as some might say a “Tax Haven” for non-residents). My traditional proposal was to simply set up a US LLC, take the default election of ‘disregarded entity’ (“disregarded entity” is an LLC that is treated by the Internal Revenue Service as a complete pass through entity. For tax purposes it does not exist. For all other purposes it does.), open a bank account, and as long as you are not earning any US Source/Effectively Connected Income, you are fine. No need to file tax returns let alone pay any taxes.

That is no longer entirely the case. FATCA has not changed the tax treatment issues, but has changed the reporting requirements for US payors. The issue of the W-9 (reporting form for US resident payees receiving funds) and W-8Ben (reporting form(s) for non-US residents receiving funds) was always a little murky but now it is downright impossible. Non-residents receiving payments from US payors, even if the funds are “not effectively connected” to US income, are now facing serious problems. No one really understands how the new W-8Ben system works since they have replaced the one form with 4 or 5 related forms that no one really understands how to use. And the penalties for getting it wrong are quite serious so payors are paying a lot more attention, or just choosing not to do business with anyone who cannot execute a W-9.

In short, it has become very difficult for non-residents to use their US bank accounts to receive funds from US payors.

My solutions:

For those non-residents who do not need to receive funds from US payors, the Disregarded LLC is still fine. Nothing to worry about.

For those receiving money from US payors, we need a more sophisticated structure. The US LLC will elect to be a ‘taxable association’ (that is an entity that will be taxed separately like a C Corporation), but it will only act as an agent of a non-resident business (with a written agency agreement) to resell non-resident goods and services in the USA. 90% of the gross income goes to the foreign provider (with appropriate W-8Ben — that will be very easy), and all operating expenses will come out of the 10% agency fee — there should be little or no taxes.

This solution is simple and easy to implement. In fact old Disregarded LLCs can be converted to “Taxable Association” LLCs with little effort. The only downside is that there is now a requirement to file an annual tax return which means there is a requirement to maintain a good set of books so that the tax preparer can accurately file the return. There may be no taxes due, but failure to file a tax return can cause a lot of problems. I have always advised my clients to maintain a set of books for professional reasons, but they were not required for US tax purposes. Now they are.

If you have any further questions please do not hesitate to contact me.