Incorporating Around the World for Entrepreneurs, What’s the Difference?
Starting a company anywhere in the world involves usually the same considerations. How do I protect my liability? What is the best way to go about it? What are the procedures? What are the tax implications? What are the regulations I have to follow? Does it matter which corporate vehicle I use?
The answers to these questions can vary by jurisdiction, so we will take a look at different ways entrepreneurs can set up in two jurisdictions across the world: the US and the Middle East.
The West: The United States
In most States, the individual will opt to setup either a Corporation or Limited Liability Company. The Corporation will separate the owners more completely from the liability of the company in most cases, while the limited liability company will hold the owners liable to the extent of their capital investment. A corporation may also opt to operate as an “S” Corporation, after meeting particular rules set by the Internal Revenue Service (IRS), which will allow the income earned to be taxed as recorded in the personal income of the individual owner receiving it. For LLCs, income is automatically taxed as recorded in the personal income of an individual owner. In addition, LLCs have fewer formalities as corporations with respect to annual board meetings or extra levels of management, such as directors.
To setup the entity, the individual or agent will need to file the required documents and forms with the local State Revenue Department or Bureau of Corporations, and this will involve creating an Operating Agreement (for an LLC) or an Articles of Association, along with any required incorporation resolutions (Corporation). These are the governing documents, serving as the corporate “constitution,” and defining the ground rules for managing the company.
Additional Sidenote: Business Formation and Business Visa, for USA and Canada
Oftentimes, a foreign individual forming a business in the US and Canada can use this business vehicle as an opportunity to do business in the country. Usually, without a business or business idea, the individual may find it difficult to receive even a visit visa to enter the country, depending on their nationality. However, if they have a business in mind, and then set up the business, this allows them to legally do business in the country, without violating their immigration status. They develop a vehicle through which to visit and partake in the economy of the country, without violating their visa status. This does not allow for permanent residency or work (outside the scope of the business perhaps, on visits), however it may present the opportunity for future sponsorship for work/residency through the business.
In addition, unlike an investor visa, the business formation and business visa does not have any requirements for the individual’s net worth, except that they must be able to fund their stay by their own means or sponsorship.
Dubai, the UAE, and the Middle East
In a country like the UAE, forming a company usually presents two options. The first is to create a mainland LLC or a Free Zone Entity. In terms of liability, generally the implications are the same, being that the owners are liable to the extent of their capital investment. However, Free Zone Entities generally permit 100% foreign ownership, while mainland companies may often require a local partner, though profit sharing may also be split more proportionately to the work and investment done by each partner. This makes Free Zone Entities attractive.
However, for trade in goods, there are restrictions on where the goods can be sold. In the UAE for example, a Freezone entity cannot distribute goods outside the Freezone, without establishing an agent in the mainland. Further, goods leaving the freezone could become subject to customs duties.
Most GCC countries also have the option of appointing a distributor or agent, or opening a foreign branch. The agency or distributorship function allows a foreign company to do business locally through an agent, with limited startup costs and liabilities. On the other hand, the foreign company will have to share profits with the agent. A foreign branch may setup a representative office locally, but it will not be allowed to do any local business in the country.
The formation of these entities requires the filing of the appropriate Memoranda of Association with the Free Zone Entity, or Mainland Ministry of Economy/Commerce, as well as the appropriate resolutions, in Arabic. For Agencies and Distributorships, the Agency contract must be filed with the Agencies Division of the Ministry of Economy/Commerce. For a branch, usually a parent company resolution along with the documents related to the parent, are required for formation.