For many startups, the design and distribution of a successful product is the initial goal, followed by getting investment and building scale.
Making a profit may be something to aim for in a few years time, at the earliest.
So you may be wondering why you should care about tax.
Here are five reasons.
1. Accessing investment reliefs for shareholders
Many jurisdictions offer generous tax reliefs for founders and early-stage investors. These can significantly boost the post-tax return on equity and form an important part of any investment decision by venture capitalists/angel investors. Failing to structure your startup to take advantage could cost you dearly in tax and lost investment.
The earlier you identify which schemes apply in your jurisdiction, and the requirements you’ll need to meet, the more likely it is that you and your prospective investors will be able to take advantage.
2. Monetising tax reliefs
Enhanced tax incentives are often available for startups that incur R&D costs in their development stage. In some cases, these incentives can be paid in cash even where the business is not yet profitable. Maximising access to these tax reliefs can provide an important source of funding that is often overlooked.
It is well worth spending time finding out which reliefs are available in your jurisdiction, and taking the necessary steps to meet the conditions and complete the admin.
3. Avoiding double (or worse) taxation
You probably assume that where you establish your business is where it will pay tax on its profits. That may be true, but if you have employees working across the world, or you sell (or plan to sell) your products overseas, you could inadvertently find yourself taxed in multiple jurisdictions.
It is easier to get your structure right at the beginning than to restructure later when your product has become valuable.
4. Indirect Taxes are often due even when there's no business profit
We all know that tax is charged on profits. But that doesn’t mean you can ignore it just because you are not yet profitable.
Many jurisdictions impose a value-added or goods-and-services tax on sales/revenues. And if you pay interest, dividends, royalties or service fees, you may need to pay withholding tax.
It’s far better to deal with these issues up front than to risk nasty surprises when a tax authority comes calling!
5. Looking forward to a future exit
At some point, you may consider selling your business.
If you haven’t kept on top of your global tax compliance, potential acquirers may be concerned about contingent tax exposures, reputational risk and penalties. At best they will discount their value of the business or seek onerous indemnities. At worst it can scupper a sale altogether.
To ensure that you obtain the best possible valuation for the business you have built, be in a position to show acquirers or investors (and their advisers) that there aren’t (tax) skeletons in the closet.
Gary Vaynerchuk has said that “we are living in the best era
of all time.”
I honestly believe that it is now easier to start a business
or create a side hustle thanks to the internet.The internet does not care what color you are, what nationality you are,
how tall or short you are etc. Clients only want to know whether or not, you
can deliver on your value proposition.
Unfortunately, starting up in one thing but being successful
is another.Part of being successful is
understanding the rules of tax and business structures.These are things that are not taught in
business school.Worse yet,
entrepreneurs look for advice from unqualified and frankly dangerous keyboard
warriors who mislead and misunderstand the nuances of international business
Many small business owners form limited liability companies (LLCs) rather than corporations because an LLC is flexible and has minimal state reporting requirements. Many US entrepreneurs set up an LLC in the beginning, because it is relatively easy and relatively cheap. Generally, this is a good approach for the start as LLCs offer liability protection and other advantages. Here's more on LLCs - http://www.mooresrowland.tax/2018/12/the-pros-and-cons-of-llcs.html
Reasons include -
As your income from your LLC increases, so does the self-employment tax. The ability to contribute to retirement accounts does not change. This is where converting the LLC to S Corp has advantages.Offering shares in your company to outside investors.Enjoying the foreign earned income exclusion while working abroad Let's talk about #1. From a tax perspective, it makes sense to convert an LLC into an S Corp, when the self-employment tax exceeds the tax burden faced by the S Corp. Some state…
Background A state must have a strong connection, also known as “nexus,” to an out-of-state business before it can impose sales and use tax obligations on that business. Previously, physical presence was the law of the land—a business had to have an office, warehouse, employees, or some other physical presence in the taxing state for tax nexus to exist. In 2018, the Supreme Court overturned the decades-old physical presence requirement and ruled that states can impose sales tax obligations on out-of-state businesses with no physical presence in the state. Post-Wayfair, nexus exists for sales tax purposes when a “taxpayer ‘avails itself of the substantial privilege of carrying on business’ in that jurisdiction.” Nexus can still be established by physical presence, but can now also be established by economic or virtual contacts. This new standard, referred to as economic nexus, significantly expands taxpayers’ obligations to report, collect and remit sales tax. Economic Nexus Economic nex…
For background, please read - US - http://www.mooresrowland.tax/2019/10/navigating-post-wayfair-world.html EU - http://www.mooresrowland.tax/2019/10/distance-selling-in-eu.html Digital Nomads in Asia - http://www.mooresrowland.tax/2018/04/tax-responsibilities-of-digital-nomads.html US Digital Nomads - http://www.mooresrowland.tax/2018/03/non-us-digital-nomads-working-for.html
Taxing remote businessesFor a government to levy corporate tax on a foreign firm, tax rules require a “nexus” or link between the taxpayer and the taxing jurisdiction, typically in the form of physical presence such as offices or workers. In our digital world, firms can interact with users and create value in a country without needing to physically set up there. More than 130 countries are discussing new rules, under the OECD’s Inclusive Framework, to change the nexus requirement so it is not dependent on physical presence. The rules will determine how to allocate some taxable profits to (and among) market jurisdict…