When I started my first business in 1985, I met a Canadian businessman who had set up an elaborate business structure for his business. His business had about $5m in annual revenues.
Actually, he had two front companies that brought in that $5m. He had three other three holding companies that owned shares in the two front companies and in each other. The businessman was moving money around these five companies to minimize the taxes he was paying. His accountant was telling him to draw a salary from this or that company, pay dividends from this company to that company, and paying “management fees” from one company to another. The accountant was taking advantage that corporate profits, dividends, and salaries are taxed at different rates. The five companies were just a game to shuffle money around — in a legal manner. But no new commerce was really created (except for the accountant and lawyer).
What about the hassle and expense to administer these five companies? Each company had to send a report to the government. The accountant and lawyer needed to be paid. Was this businessman actually saving enough with lower taxes to make this all worthwhile? I don’t know. But I can see some businesspeople willingly incurring a big administrative expense just to not pay taxes.
That was in 1985. These days, this kind of businessman would likely incorporate a sixth company in an offshore tax haven. This company would likely own the shares in all five Canadian companies. And it would issue an invoice to these companies called a “management fee.” Money would flow from Canada to the country of the tax haven. It is only a coincidence that these management fees reduce the income to the Canadian companies to zero. No profits, no Canadian corporate taxes. Even though the operating business does all its business in Canada.
The tax haven country would charge the tax haven corporation a much smaller tax than the Canadian government. The tax haven gets the benefits this tax revenue — without having to provide services (like roads and police protection) to run the front businesses in Canada.
The businessperson’s money is now sitting in the bank account of the tax haven country. There would be several ways to move that money back to Canada with minimal taxes. For example, a credit card based in a bank in the tax haven country can still buy things in Canada.
The spolu network is going to make all this transparent. To be in the spolu network, a lot of financial information must become public knowledge.
Some businesses would prefer all this information to be private. If so, then they should stay with the corporate model. But these businesses won’t get the benefit of being in the spolu network.
Instead, spolus should show off the taxes they have paid and the profits they have distributed. This would give them more credibility of being an honest business in their community, province (state), and country. And with a reputation of being an honest and contributing business, they should find more business.
When a spolu business gets too convoluted, the spolu network should consider kicking it out of the spolu network.
Let’s bring back my four axioms:
1. Keep your business structure simple!
2. Focus on the business!
3. Pay your taxes!
4. Distribute your profits!
Do business to distribute profits! When this becomes the primary business objective, so many other things will fall into place to run a fantastic and respectable business — and a network of businesses. The Spolu Network.
Published on Medium 2024
