An Analytical Model for Evaluating Strategies

People often ask me, “What is the best business structure/solution for global business?”

This is a very good question, but sadly leads to some very bad answers. People have a tendency to look at solutions in a rather simplistic manner, and then get surprised when their solutions do not really work. They go from “This is the greatest thing ever!!!” to “This is the worst thing ever!!!”

I prefer to use an Analytical Model to answer this question. This requires some time and patience.

Part of the problem is how service providers tend to market their products. They tend to focus on specific jurisdictions. Frankly, even I find myself doing this. Most of this website is aimed at selling my services to help you set up a US Limited Liability Company that can be used to give you access to banking, merchant services, investment opportunities, etc.

However, I begin my evaluation of a prospective client’s circumstance by analyzing his situation. I have a simple but important Analytical Model to help me to better understand what would be best.

I like to think of the various options as tools that can be used to help people do business. These tools are varied and depend a great deal upon what is needed. As the old saying goes, “If the only tool you have is a hammer every problem is a nail.” This way of thinking is unfortunate, dangerous, and unnecessary. I like to think of the various options as different tools in my tool kit. Some work better for some problems, others work better for others.

My first line of questioning is to discover the client’s current residency issues: What is your citizenship? Where are you living? Where would you like to live? What are the tax rules?

Not all countries are the same. For instance, someone from Sweden has almost no problems regarding residency if they want to “opt-out” of the system. They more or less only have to leave. People from other countries often have to deal with some remarkably difficult obstacles. So before I start talking about US LLCs, or UK LPs, or Georgian JSCs, etc. etc. etc. I first want to understand this issue.

Then I ask, “What do you want to do?” I like to know what you want to accomplish before I start trying to sell you a solution.

Yeah, I know that’s crazy.

Once I better understand the issue of residency and what the client really wants to accomplish, only then can I start thinking about which business structure(s) might be best. This is an area where people get very confused. Some company entities are better for certain situations than others. Some jurisdictions work better for some clients than for others. You have to take it case by case.

The biggest problem I encounter is “jurisdictionitis“: the irrational belief that one jurisdiction will magically solve all your problems. Even for the best of jurisdictions this is not the case. Delaware can be great for one client, and Texas might be better for another. The same goes for different countries as well.

For one client I spoke to about a year ago, because of his unique business and family situation combined with his citizenship, the ideal solution would have been very simple:

  • to establish a residency in the Republic of Georgia due to its Territorial Tax Treatment,
  • a US LLC to manage his global professional consulting business, and
  • a Georgian company to establish a new Internet venture.

Georgian residency would have been ideal since it is a “territorial” tax country for individuals (that is you only have to pay taxes on income you earn inside the country — thus his consultancy business outside of Georgia would never be taxed), and his country of citizenship would have then considered him a non-resident and he would owe no taxes there. The US LLC would have allowed him to easily gain access to US banking making it easier for him to get paid from his US-based clients while avoiding US taxes since his business is outside the USA and the US LLC would be a considered a “disregarded” or a “pass through” entity in regards to US taxes. Finally, the Georgian company would have been ideal for the Internet venture because of something called the Virtual IT Zone Company which is a terrible name for an awesome tax exemption; any company in Georgia that is doing business in what the government loosely defines as IT can request a tax exemption for all income earned outside of the country in the IT industry — thus tax free.

Although these three separate solutions would not have been terribly expensive to set up or manage, and would have effectively resolved 100% of his problems, he only wanted one “thing” that would do it all for him. I honestly do not know of any such single “thing” that will accomplish all these tasks, but I hope if and when he finds it he will let me know — though I am not optimistic. I rather suspect he will end up getting cheated by some unethical internet personality claiming to be an expert who will lie to him, tell him what he wants to hear rather than the truth, and then sell him some outrageously priced solution that will not actually work for anything, and will most likely get the man into a great deal of legal trouble.

So there you have it. My Analytical Model for how to resolve these problems: analyze the residency issues of the proposed client, find out what the client actually wants to do, and then find the appropriate tool(s) to address those issues.

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!