Thread by @mahadevanarj

Imagine having a business with $0 of revenue in the US...

...but you end up paying *over $100M in taxes* to the US Government 😱

This unfortunately happened to @brianrequarth 😩

Here's the story of how choosing the wrong biz structure (LLC vs. C-Corp) can cost you millions 👇🏽

*Disclaimer*

I am not a tax or legal professional nor is this thread tax or legal advice

If you do want tax or legal advice on launching a US company follow @mahadevanarj and shoot me a DM; happy to connect you with a US CPA with international tax expertise!

* Disclaimer*

When starting a company, $ is tight, and founders will do anything to save cash

This makes sense. As @paulg says, spending too much is one of the top reasons startups die

https://twitter.com/paulg/status/1224328241936248832?s=20

Brian was a founder in Latin America and started by creating an LLC in California

Why a California LLC?

This was recommended by a local accountant

Unfortunately this accountant didn't have much experience with venture capital or LatAm 😬

Later on, Brian hired a local law firm

Unfortunately, they also didn't have experience with venture capital 😬

The law firm advised him to create a C-Corp which seemed like great advice at the time!

Fast forward some time, Brian realized that *even though his business had no operations in the US* (repeat: his biz had no operations in the US) they would still be subject to US taxes upon an exit!

At this point they had also raised VC money so restructuring was prohibitive

After a merger, Brian ended up selling the business. Hooray 🎉

But they paid millions to lawyers and accountants to get the deal done...

And once the transaction was complete the company paid over $100M to the US government *despite the business having zero revenue in the US*

Why did Brian's company have to pay $100M despite having no clients or operations in the US?

If you start a C-Corp in the US, like the Hotel California: you can check in, but you can never leave

Delaware C-Corps pay a corporate tax on profits

In Brian's case, the acquirer wanted to buy the local operating companies

The companies were Brazilian entities *owned by the Delaware C-Corp*

Therefore the money from the purchase flowed back to the C-Corp counting as a profit for the C-Corp

US profit = pay US taxes 😬

This is truly the stuff of nightmares 😱

And there are many Latin American companies that have gone through this where they pay millions to the US government despite:

- No US clients
- No US Operations
- No time spent in the US

They then end up paying $$$ to fix things 😩

So the million dollar question:

How do you avoid this nightmare scenario of paying taxes to the US despite having no revenue, business or operations in the US?

@MagmaPartners put together this overview of how founders can navigate situations like this latamlist.com/legal-structur…

The tl;dr is Latin American startups should think carefully before creating a Delaware C-Corp

If you start as a C-Corp it can be hard to restructure

And even if you restructure you still have to pay taxes on paper profits to date

Therefore for Latin American startups a Delaware LLC could be an alternative which preserves optionality to in the future to convert to a C-Corp

Check out @nathanlustig's post on "Why US VCs don’t use LLCs, and why Latin American startups might want to" latamlist.com/why-us-vcs-don…

Lastly, a massive thank you to @brianrequarth for publicly sharing his story 🙏

Brian said he was willing to share his story publicly because he was happy to share his 2 cents as it ended up costing his company a lot more than that (pun intended 😅)

https://twitter.com/brianrequarth/status/1345064546256498689?s=20

And another big thank you to @nathanlustig for sharing more about Brian's story in his blog post "Legal Structures for Latin American Startups" which was the inspiration and source for this thread

latamlist.com/legal-structur…

And if you:

- run a US business

- are thinking about starting an LLC or C-Corp one day

- or want to get intro'd to a CPA to discuss US taxes for your specific situation

Follow @mahadevanarj and shoot me a DM

I tweet about launching, maintaining, and growing a US Business 🚀