Foreign startup, US venture capital, and taxation(hodgen.com)
hodgen.com
Foreign startup, US venture capital, and taxation
http://hodgen.com/foreign-startup-us-venture-capital-and-taxation/
2 comments
Aaaaahhhhhhh. What would you suggest for people setting up startups setup as a general structure before everything getting properly started to avoid things like the 6 million dollar domain name headache after your MVP has some traction, but not 'too much' traction. Assume it's the typical SaaS/software business.
If you're a nonresident of the United States, own the domain name as a human. If you have a company formed outside the United States, that can be an owner, too.
For the IP you develop, start with the assumption that whoever pays for the work to be done = owner. The humans working on the code should be employees of the company outside the United States, or independent contractors working for the company outside the United States. This is the "work for hire" idea.
If you've done things wrong, it's better to fix it while the company is still growing and not too profitable. If there is a tax problem it won't be too big. After all, what is the value of a domain name for a typical SaaS situation when it's only making a few thousand a month at the moment? Not much.
The future lies ahead, etc. etc., but at the moment the assets (and code) could reasonably be valued at approximately what you paid to develop them. If you spent $50,000 to get to this point and you're at break-even, arguably the value of the domain name and all of your code and your traction so far is close to $50,000. You're selling for what you spent to buy the asset. Zero tax.
For the IP you develop, start with the assumption that whoever pays for the work to be done = owner. The humans working on the code should be employees of the company outside the United States, or independent contractors working for the company outside the United States. This is the "work for hire" idea.
If you've done things wrong, it's better to fix it while the company is still growing and not too profitable. If there is a tax problem it won't be too big. After all, what is the value of a domain name for a typical SaaS situation when it's only making a few thousand a month at the moment? Not much.
The future lies ahead, etc. etc., but at the moment the assets (and code) could reasonably be valued at approximately what you paid to develop them. If you spent $50,000 to get to this point and you're at break-even, arguably the value of the domain name and all of your code and your traction so far is close to $50,000. You're selling for what you spent to buy the asset. Zero tax.
Thanks for the answer!
I'm a Canadian that works in the US on a TN. Would it probably be a bad idea to get a green card even if I have future bay area startup aspirations?
I'm a Canadian that works in the US on a TN. Would it probably be a bad idea to get a green card even if I have future bay area startup aspirations?
Second thought. Completely unrelated but it comes up again and again and again.
If you're here in the USA and you have an RRSP in Canada, be sure you file Form 8891 to make it tax exempt in the USA. If you're living in California guess what -- the earnings inside your RRSP are tax free on your US income tax return (Form 1040) but your RRSP earnings are taxable in California (Form 540).
Also don't forget Form TD F 90-22.1 -- the dreaded FBAR form. You're living here in the USA, so you're a resident and obliged on pain of death (I only slightly exaggerate) to disclose all of your foreign financial accounts. That means all of your Canadian accounts including RRSPs if you have them.
If you're here in the USA and you have an RRSP in Canada, be sure you file Form 8891 to make it tax exempt in the USA. If you're living in California guess what -- the earnings inside your RRSP are tax free on your US income tax return (Form 1040) but your RRSP earnings are taxable in California (Form 540).
Also don't forget Form TD F 90-22.1 -- the dreaded FBAR form. You're living here in the USA, so you're a resident and obliged on pain of death (I only slightly exaggerate) to disclose all of your foreign financial accounts. That means all of your Canadian accounts including RRSPs if you have them.
Canada <---> USA is kind of like Frying Pan <---> Fire in terms of income tax. There is a really good income tax treaty between the two countries that will eliminate a lot of little wrinkles.
For the moment, stick with the TN. It means that you can easily exit the USA and eliminate exposure to US taxes if you need to.
For the moment, stick with the TN. It means that you can easily exit the USA and eliminate exposure to US taxes if you need to.
Hilarity ensued."
Huge problem that most startups don't realise from the get-go. IP transfer is a huge issue and it needs to be right from the beginning - that's why seperate holding companies for IP [ala Skype] are typically a good organisational alternative.