If you want to got become a serious international professional, you need to set up a company. More specifically, a legal entity.
Why? I will give you a couple of reasons.But first let’s briefly discuss what a legal entity is…
A legal entity is effectively recognized as a person under the law. It can engage in contract with other parties, it can open bank accounts, it can hold assets, it can sell goods and services, in a lot of case it has to pay taxes and it can sue or be sued in court in the same way as natural persons can.
It requires legal personhood when it is incorporated in accordance with the law of its jurisdiction.
So a legal entity stands on its own and has a shareholder who is entitled to the profits and a director who is responsible for the management of the company.
Why Should You Set Up A Company?
You can also engage in business in your own name so there must be benefits. I will give you seven and a half reasons in order of importance. According to my humble (but accurate) opinion:
1. Protection of personal assets
Since running a business often means you are incurring risks. Your business could go bankrupt, you could be sued, creditors might go after your assets, you could run into disputes with business partners.
Having a limited liability company means that you are only at risk for the amount you put in as share capital. The assets that are in your personal name like your house and bank account can not be touched.
This is the most important of all. Imagine that with everything you, or anybody in your company does your entire life is on the line. Nobody would start a new business, especially not with a revolutionary and untested product.
If you play it right setting up a company will give you tax benefits. Dividends are taxed lower than income tax. You can have all sorts of “costs” deducted.
And if you operate internationally and set up an international business you can have huge tax benefits. Eliminating VAT, or all taxes together.
If you want to understand where an international business need to pay taxes read the following: Where To Pay Taxes
3. Professional appearance
Most people feel more secure and confident dealing with a legal entity as opposed to an individual. Having Ltd. or Inc. after your company’s name adds a touch of professionalism and credibility to your business dealings.
Sending an invoice in your personal name from your mothers basement is one way to instantly lose credibility if you are dealing with any self respecting company or client.
If you run a business, you will attract unwelcome attention, especially if you are successful. Aggressive creditors, ambitious lawsuits, thieves and scammers.
If you structure it right, you can set up a legal entity in such a way that the outside world does not know who is really behind the company.
It is difficult for someone to steel your assets, when they do not know where they are.
5. Easy to form partnerships
Everybody knows that marriage in community of property is a mistake. Right?
But what is even a bigger mistake is to run a business with multiple partners with full liability. This means that not only is everybody personally liable for the risks of the company, but also at risk for the personal actions of their partner, or the tell sell addiction of their wives!
Thus, when incorporating a new legal entity, it is an ideal moment to create a clear contract, deciding on profit and liability.
As long as the annual fees are paid, your company will continue to exist. Even if you, the shareholder or the directors die. This can ensure that your business continues to be run on the benefit of your heirs.
You can use this knowledge for estate planning. Determining who gets which part of you fortune. Because why should the government determine what happens with the some of your entire life’s worth of productivity?
7. Transferable ownership
A standard limited liability company has shares. Those shares are easily transferable to others, either as a whole or in smaller amounts.
Easy to monetize on your company while staying in control, is selling a minority part of your shares.
You can also raise new capital for your company by issuing new shares.
Well that it is it. Sufficient reasons to start your own legal entity as soon as you engage in business.
Are there also downsides to setting up a company? Sure, minor ones.
1. Keeping books
When I first went to the Dutch chamber of commerce the guy who helped me warned me. Know what you are doing. It is not something like putting on shoes. Setting up a legal entity comes with responsibilities and in some case filing and tax requirements.
One of the main things is that almost everywhere in the world you will have to file annual accounts. Even when nothing happened yet and you did not even sell anything yet, you will have to file annual accounts. If you don’t know how, you will have to hire someone to do it for you.
Setting up a legal entity costs money. And it will cost money annually, even when you are having a bad year. And while often simple limited liability companies are cheap, to maintain, some trade licenses in Dubai cost thousands of Euros.
I have met a client who wanted to set up a structure to hold real estate. The annual rental income would be almost completely spend on the annual fees of that structure. That just does not seem like a good idea.
The benefits of setting up a company far outweigh the downsides.
Are you planning on setting up your own company? Make sure to Check This Out.