Opening and Owning a Business for Expat Entrepreneurs — A US Tax Guide

Seeking opportunities and experiences in other countries is one of the reasons why expats thrive elsewhere. Countries with booming economies attract expat entrepreneurs, but it can be quite a daunting task, especially if you want to build a business from scratch. Rest assured, though, it’s doable. Here’s a comprehensive guide on how to open a business for expat entrepreneurs.

Business Landscape for Expat Entrepreneurs

More than 160 countries host nearly 9 million American expats. This number is big enough to populate major cities, including Chicago, Philadelphia, Los Angeles, and Tucson.

While Americans take the top spot in the most number of expats by citizenship, United States passport holders do not have a monopoly on the expat experience. According to an Internations survey, other citizenships that take up large portions of the expat population include British, Indian, German, Italian, Canadian, French, Australian, South African, and Dutch.

The same survey reveals the usual motivations for expat migration—love and family, education, lifestyle, and job and career. Among survey respondents who migrated for “job & career,” only 2% answered, “starting my own business.”

However, it’s important to note that this seemingly slim figure is not on account of a lack of business opportunities. The trend is more traceable to the all-too-possible scarcity of expats who have the heart and guts to pursue an entrepreneurial endeavor abroad, which will be a real test of a person’s business acuity.

How to Open a Business for Expat Entrepreneurs

Once you’ve picked your country of choice, the next step in how to open a business abroad is the preparation stage. Here’s what we recommend.

1. Know the country

Countries don’t have the same business regulations. Hence, it’s imperative to know the specific policies imposed by your nation of choice. For starters, different data protection policies exist depending on where you are. Therefore, it’s crucial to study those to develop appropriate data management protocols that ensure utmost government compliance.

2. Study the market

You cannot do away with foolproof market research. That’s what will inform your business plan. The dominant market in your choice of country can spell a huge difference in the success of your business. Furthermore, this will give you insight into what type of products or services will thrive.

3. Make a business plan

A business plan is the blueprint of your entrepreneurial venture. It not only gauges the feasibility of your idea but also enables the plotting of action plans to pursue your objectives. You can better navigate fluctuations in the market with a solid business plan.

4. Set your business budget

Budgeting for business must take into account available resources, fixed and variable costs, as well as profit projections. As an expat entrepreneur, it’s important to be pragmatic. Otherwise, you may end up spending more than what you can without getting the ROI you need to keep going.

5. Create a marketing plan

Doing business in a foreign country means dealing with cultural nuances that you may miss without thorough study. That means your marketing plan must be tailored to fit where you are. Your marketing plan should also foresee business expansion along the line.

6. Get an international license

The rules for registering your business will depend on the country. Ensure utmost compliance, so you do not unwittingly break local policies.

7. Buy an insurance policy

It’s best to prepare for all contingencies. For example, if your business falls victim to a catastrophic natural event, it pays to be covered by business insurance.

8. Work with a tax professional to sort your business taxes

Do not hoard all responsibilities. Delegate tasks such as your business tax duties. Work with a tax preparation services provider. You will have peace of mind if you do so, knowing you’re tax compliant. Meanwhile, you can focus on more critical aspects of running your business.

Essential Tax Preparation Tips for Expat Entrepreneurs

With these tips, you can effectively run your business abroad as you would in the U.S.

Tip #1. Keep separate accounts for business and personal matters

You may think that having one bank account for your personal and business matters is fine since you don’t have many expenses yet. Whether you’re handling a small or big operation, your own money must be in a separate bank account from your business expenditures for tax purposes.

Make sure that all your business income and expenses are made using your business account. By doing this, you can organize and balance your business finances accurately without getting confused.

Foreign bank accounts

Suppose you opened foreign bank accounts that reached an aggregate total balance of $10,000 at any point during the tax year. In that case, you’ll need to report it to the Internal Revenue Services (IRS) by April 15. If you miss the deadline, there’s an automatic extension until October 15.

You must file a Foreign Bank Account Report (FBAR) or FinCEN Form 114. FBARs are required not only on accounts under your name (or business name) but also on those you have signatory authority over, like a foreign bank account for your small business. For this, you need to report it separately as it’s not part of your tax return.

Tip #2. Claim a tax deduction on start-up costs

The money you shelled out to start your business can be tax-deductible. You can pay less on taxes with various credits and deductions.

Remember that you should claim deductions only on expenses that have something to do with your business. For example, don’t report expenses on your new blender if you’re working as a marketer. Use your best judgment as to what is considered a business expense.

Some examples of expenses you can deduct are:

• Travel
• Vehicle use
• Rent (business equipment and space)
• Meals
• Internet and phone bills

For a start-up business, you can claim research and development deductions. When you’re still feeling out if your business is feasible, you can deduct expenses on training employees and ordering supplies.

Tip #3. Know the difference between employees and subcontractors

Subcontractors or freelancers are hired on a project basis and use their resources when working. By distinguishing the two, you can determine which tax form you should file.

If you’ve hired employees, you should file Form W-2 for each of them if they are working in the U.S. or a U.S. taxpayer (i.e. U.S. citizen, resident or green card holder). This document will state their wage and tax statement. If you’ve hired freelancers, you should file Form 1099-NEC. This will report the payments made in exchange for the services provided.

If you get these two confused with each other and file the wrong form, you can get in trouble. It can result in costly penalties, which will lead to a large tax bill and unpaid Medicare and Social Security taxes.

What if my employees or subcontractors are non-U.S. persons?

For foreign subcontractors, you don’t have to file a Form 1099. Instead, it would be best if you ask them to complete a Form W-8 BEN, a document that certifies your subcontractors are not U.S. taxpayers. You don’t have to submit this form to the IRS. It’s just a supporting document in case of an audit, and they ask you why you didn’t file for a Form 1099.

Non-U.S. taxpayers aren’t subject to any U.S. tax reporting, so you don’t have to submit a Form W-2.

Tip #4. Have a solid payroll system

When you own a business, tax preparations go hand-in-hand with the payroll, so you must know the ins and outs of the system. In this part of the business, you have a lot of responsibility in keeping your documents updated and filed on time.

Make sure you ask your employees to complete Form W-4 so that you can withhold the correct federal income tax from their pay. Employee deposits to Medicare and Social Security payments should also be up to date and accurate. If you miss a date or deposit the wrong amount, you’ll face hefty penalties.

All of these may sound overwhelming for a novice entrepreneur. You’re not alone. Most entrepreneurs hire accountants or get help from tax preparation services to ensure that everything runs smoothly for at least the first year of their business.

Tip #5. Choose a corporate structure wisely

When you start a business, you must determine the corporate structure you belong to under the IRS. It will decide your tax requirements and the form you should file for an income tax return.

The different types of U.S. business structures are:

• Sole proprietorship
• Partnerships
• Corporations
• S Corporations
• Limited Liability Company (LLC)

LLC is one of the most popular business structures for expat entrepreneurs. It allows you to form your company in any country.

There are various kinds of LLCs, such as domestic and foreign. Domestic LLCs are businesses that are organized and registered in your home state. The IRS disregards domestic LLCs and treats them as a corporation, partnership, or part of the owner’s individual tax return.

Foreign LLCs do business in countries other than their home state. For these, you must file Form 8832 and elect your business as a foreign LLC so that the IRS can give you a disregarded status. You only have to do this once. However, you must file Form 8858 yearly to maintain your disregarded status and prevent the IRS from classifying your business as a corporation for tax purposes.

Tip #6.  Keep a detailed travel calendar

If your business requires you to travel back and forth between the U.S. and other foreign countries, you should keep an accurate travel calendar. It would help if you noted all the expenses you’ve made during this time and where you made it.

Expenses made in the U.S.will affect your calculations for Foreign Earned Income Exclusion and Foreign Housing Exclusion or Deduction. This is crucial for your tax return preparations. Your deductions and income should be divided by transactions made in and out of the U.S.

Tip #7. Ensure your business is tax compliant

The IRS can better view your global transactions through the Foreign Account Tax Compliance Act (FATCA). It means that your non-U.S. transactions can undergo U.S. taxation. With this, you must report your foreign assets on Form 8938 if you have more than $200,000 of specified foreign financial assets at the end of the tax year.

Suppose at least 75% of your business’ income is passive (e.g., royalties, dividends, capital gains) or at least 50% of your company’s assets are passive (e.g., investments that produce capital gain, interests, or dividends). In that case, your business becomes a Passive Foreign Investment Company (PFIC).

With PFIC, you need to follow a different set of reporting requirements. You must keep an accurate record of your dividends, shares, and other undistributed income earned by the company. The IRS is strict when it comes to tax guidelines under this category.

Tip #8: Consider foreign tax rates

The country where you start the business matters, as each has different tax policies. For example, in Japan, the tax rate for corporations can run up to over 20%, and individual marginal tax rates can go as high as 45%. Meanwhile, in the United Arab Emirates, there are no individual and corporate taxes.

Where you move or start your business will greatly influence your financial success, so make sure you research before establishing your foreign company.

4 Crucial Tips for Opening a Business as an Expat

To maximize the prospects of your foreign business venture, make sure to adopt the following strategies.

1. Build your network

Know as many people as you can from as varied industries as possible. Your built network can help you in one way or another. For instance, someone working in the shipping industry can introduce you to a logistic partner that will significantly improve your ecommerce business.

Do not limit your network to fellow expats. Get intimate with the locals, too.

2. Do proper documentation

Document online and off. Keep physical records in reliable storage so you can easily refer back to them when you need to. As for digital records, you can use the cloud for back-end business documents. Meanwhile, there’s social media for records you want your target market to see. Remember to post accordingly and in a way that’s consistent with the brand you want to build.

3. Follow all the legal requirements and processes

Government compliance will do you no wrong. So, make sure you are aware of all local policies relevant to your business.

4. Immerse yourself in the culture

You will not know your target market in a foreign land if you refuse to be immersed in their culture. So, roll up your sleeves and acclimate to where you are, not just as an entrepreneur but as a human being.

Start A Global-Ready Business

After a major roadblock in the past couple of years, the world is again opening up. In no time, borders will happily welcome expats from all over sans restrictions. That will be your chance to pursue your dream of building a business from scratch in a foreign country. If you take to heart this comprehensive guide, then you increase your chances of succeeding.

As for your business’s tax compliance, it’s best to work with a reliable tax resolution partner. On that note, you get the best in class tax preparation services from Tax Samaritan, so don’t hesitate to reach out to our team of tax experts.