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Startup Ltd.
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Startup Ltd.

Tax Planning and Initial Incorporation Location

Susan C. Morse
The BetaCodex Network, 2013
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The inexorable mystique of Silicon Valley entrepreneurs working long hours in cramped quarters has captured the public’s imagination. Indeed, much of America’s fascination with start-up culture lies in understanding what drives creative entrepreneurs to sacrifice so much for the process of invention. In this Florida Tax Review article, professor Susan C. Morse takes her analysis back one step in a company’s history so she can address a more fundamental question: How and why do start-ups initially decide to incorporate in a certain country and, if in the United States, in a certain state? While Morse’s article focuses on how tax considerations affect start-ups’ decisions regarding incorporation locales, it also provides a broader scope. Morse details a diverse range of factors that could influence the next Steve Jobs or Mark Zuckerberg, including corporate governance, intellectual property and concerns over liquidity. getAbstract recommends this article to entrepreneurs, finance professionals, accountants, business strategists, and anyone who may take an interest in the operational and tax policy minutiae of start-ups. Although the article is definitely a profitable read, less-initiated readers should come armed with a dictionary of technical tax terms.

Summary

Taxes Everywhere

Tax treatment is a pivotal factor in a start-up’s decision about where to incorporate. The US, , unlike many other countries, considers a company’s residence for tax purposes through “a brittle place-of-incorporation rule”: A firm that incorporates in the US faces tax obligations regardless of whether it even operates or earns revenue in the country. As a result, US-based firms adopt many different tactics to lower their collective tax burden, particularly on non-US income. These strategies include “transfer pricing, deduction allocation, income source and subpart F planning.”

Start-ups also may choose to incorporate outside the US. Non-US incorporation conveys numerous potential tax advantages, including lower base rates and the ability to decouple a portion of any foreign subsidiaries’ earnings and payments from the parent organization’s financial statements.

Indeed, many firms opt to incorporate in such “tax havens” as Bermuda. Although Bermuda-incorporated firms may have operations in the US and earn revenue there, they do not necessarily pay corporate income tax in the US. Many firms also incorporate outside the US to reduce their tax burdens...

About the Author

Susan C. Morse is an assistant professor at the University of Texas School of Law.

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