Mistakes Entrepreneurs Make When Going Global
Expanding your business abroad is a great way for entrepreneurs to target new markets and pull in fresh clients, but some business people who want to go international do it for all the wrong reasons.
Here are five examples given by company formation agents of classic mistakes entrepreneurs make when casting their eye on the global market.
1. Tax Breaks Can Break You
There are countless entrepreneurs who come unstuck after opening a company in another country only to find that they didn’t qualify for any of the tax breaks they thought they were entitled to. Unless you’re an enormous tech company or coffee chain with an army of lawyers working round the clock to find loopholes in the international tax system (which often means squirreling your funds away to some little offshore haven) don’t even contemplate trying to circumnavigate a foreign country’s tax laws. If you want to open a business in a different country, there has to be a very good reason – such as clients, exports, staff or actual on the ground premises like factories or shops. Otherwise you’re likely to get a larger tax bill than you expected and also a nice little follow-up visit from the tax man which is one visitor you could do without.
One company formation agent got a call from a hairdresser in Spain that was dead set on opening a business in Ireland to take advantage of the low 12.5% corporate tax rate. But according to the tax law in Ireland, a foreign business has to prove it has a trading address in Ireland and contribute to the Irish economy by either using Irish suppliers or employing an Irish workforce. This came as a bit of a blow to the Spanish entrepreneur who wanted to live and trade in Spain using his Spanish employees. He couldn’t even lay claim to having any ex-pat Irish clients!
So do your homework before rubbing your hands together at the thought of saving all that tax as you might just find you’ll be out of pocket or have a black mark against you at the tax office.
2. Thy Rod and Thy Staff
Hiring employees is a big consideration for a business and can take out a huge chunk from the annual budget. So you can’t blame some people for checking out other countries for the best deals on staff.
Unfortunately for one foreign business owner, his plan to open a company in Poland purely to hire inexpensive Polish workers backfired badly. Had his workers stayed within Poland he would have indeed benefited from the low labour rates on employees. But what he didn’t know was that when he hired his cheap Polish workers and then bussed them into France to work, he was then bound by the labour laws of France, which – as any of you may have guessed – are far more complicated and pricey.
As his company formation agent warned him – if you’re doing business with other countries, you have to abide by the laws of not only the country you OWN a business in but also the country you are DOING business in.
3. When VAT goes SPLAT
Many company formation agents are regularly contacted by potential clients from the US and Canada who are enticed by Hungary’s speedy VAT system.
Unlike most countries where opening a company and receiving a VAT number takes at least a few weeks, Hungary can set you up with your business and give you a VAT number in a record-breaking 72 hours!
So far so good. But what many American and Canadian entrepreneurs don’t know is that in return for getting your company and VAT number so quickly you then have to deal with a foreign tax system which isn’t such a bundle of fun. That’s why the Hungarian system insists that in order to benefit from this fast-track service you’ll need to have a qualified Hungarian accountant ready to do your bidding.
Other countries aren’t quite so strict about insisting on a qualified accountant at the start which – although easier – means than many US or Canadian citizens who come to Europe to set up their business fall foul of the accountancy rules and procedures. For example, you can set up a company in France without a chartered accountant, but if you don’t have someone on your side who is clued up on the ever-changing French tax laws and EU regulations, you could find yourself with being audited by the dreaded French tax inspector.
Entrepreneurs shouldn’t count on a foreign system for a quickie VAT number or a quick company formation until you have factored in the time and money you need to spend to get a solid and well-established local accountancy firm.
4. Don’t Bank On It
After September 11, opening a bank account in the US became considerably more difficult – more paperwork, more forms, more ID. You may be able to open a company relatively easily but without a bank account you can’t run a business, so you need to make sure your banking is in order before you go full steam ahead with your business idea.
In 99% of cases, US banks require a face-to-face meeting to double check ID and signatures and get an all-round view of the potential new customer. But the main sticking point is that in order to open a bank account in the US you need to obtain an EIN number which stands for an Employer Identification Number – the equivalent of a tax office ID.
Unfortunately, being a foreign national and non-US resident, this isn’t easy to come by. And a word of warning here – don’t get caught out by dodgy websites that say you don’t need an EIN number and give you a cheap deal on opening an account without an EIN.
One foreign entrepreneur found out the hard way by paying a cheap provider for a bank account without an EIN number. He then traveled all the way to the States to find out that he couldn’t even open his account. There are a huge amount of scamsters out there so make sure you choose a reputable company formation agent or financial advisor.
5. Easy Does It
With America’s go-getting entrepreneurial attitude and its open-armed spirit for foreign investment, the US is a welcome home for many foreign firms looking to expand.
But before you jump right into a different country’s business system you should have a long hard think about language. Company formation agents always have bilingual – if not trilingual – employees to help you set up your business. But once their formative part is over, what happens when you’re left with a company in a country where you don’t speak the lingo?
This was the problem that faced a French football agent who wanted to set up a company in the US because it was much cheaper and easier than setting up in his home country. But what he didn’t bank on was that in order to do deals with the football clubs and get his clients onto US teams, he’d actually have to negotiate in English.
So all the money he saved in setting up a company in the US he then had to plough into paying for a translator. When setting up abroad, it always pays to go to a country where you have at least a basic understanding of the language or you have a business partner or employee who is bilingual.
Don’t Make Mistake Number 6
There are of course a multitude of ways entrepreneurs can slip up when opening a business abroad – these five mistakes are just the tip of the iceberg – but if you employ experts in the field like company formation agents, accountants and lawyers, you’ll be saving yourself a fortune down the line as well as your peace of mind. Not to mention gaining a fantastic knowledge of your new market and saving yourself precious time that can be utilised into growing your business on the global scale you’ve always dreamed of.