I am starting a web-based software company which will sell its
products via a monthly subscription model, very much like 37signals
Basecamp.  My primary market will be the U.S. followed possibly by
other developed countries.  I am a U.S. citizen but have been living
in Bermuda for 5 years, and am not sure if and when I will return to
the United States.

I am interested in finding out how / where I should structure  /
incorporate my company to minimize my liability and taxes, and am also
interested in what the tax implications of my 'subscription' based
software model are.  I essentially would like to answer these
questions:

1) Could I possibly incorporate my company in a tax haven like Bermuda
or the Cayman Islands to reduce my tax burden.  Would I need to live
outside of the United States as an expatriate.  Would I need to have
my web servers outside of the United States?  Essentially, based on my
business model, and being a U.S. citzen, would there be any possible
advantages to incorporating / hsoting my business in another domicile
while 'selling'
software to U.S. citizens?

2) If question #1 is out of the question, what is the best structure
for incorporation, and what state(s) should I incorporate in.  My last
state of residence before moving to Bermuda was Michigan.  I would be
willing to take on partners / members in this venture.  I would like
to shield my personal assets from any liability ( i.e. Personal
Savings, 401k, Investments, etc. ) although I will be putting about
10% of my net worth into this venture.  Based on my research it sounds
like incorporating a LLC in Delaware would be my best option.  What
structure would best limit my risk and lower my tax burden based on
the e-business nature of my business.

3) What are the tax and legal ramifications of 'renting' software over
the internet.  I won't be selling CD-Rom's or anything physical.  I
will essentially be providing software as a service for a minimal
monthly fee?  Do I have to charge sales tax for my U.S. customers
state?  What if they are in Canada, England, Australia, or South
Africa?

I am no expert on this - but certain things ring a bell.

You are a US citizen therefore, regardless of domicile, you are
personally liable to US tax. There are double taxation agreements.

You could certainly incorporate your business in Bermuda or The
Cayman's, this would reduce your corporation's exposure to corporation
tax.

A corporation is a totally different entity from the owner(s) of a
corporation, they are designed to shield personal assets so hiding
behind one is often a good idea.

I'm not aware of any laws barring US citizens owning stocks in
overseas/exotically located companies.

Delaware is quite possible, it is not unknown for UK based companies
to be registered in Delaware.

Non European vendors of software or services to Europe (inc UK) are
'deemed' responsible for charging VAT (sales tax) on all sales to
European clients. They are supposed to collect and remit the tax - it
caused quite a stir in the Shareware industry. I'm not sure about the
USA and Canada, you need to check with an expert or Google the
appropriate shareware News Groups.

However such rulings are a 'moveable feast' and tax collecting
entities seldom pass up a chance to get their noses in your trough.

To summarize, incorporation is designed to protect/limit personal liability.
Low corporation tax areas are handy when you want to keep the money in
the company, but officially :-) they do not necessarily affect US
citizens taxation on personal earnings. Under certain jurisdictions
one could (ahem) borrow from ones own corporation.

If you don't own the servers, then their location should be
irrelevant, if you do own them, there is no reason why they should not
be a separate corporation that sadly just manages to break even.

On a personal note I would suggest that you are very careful about investors.

Mainly I'm posting this because I recognize some of the 'problems',
and hope that a few people who are more clued up will jump in.

Good Luck.

This is quite complicated and you will need Tax Attorney to create
structure for you.

I did a google search with the terms: nevada incorporate shareholder
laws.   Most of these sites are law firms that help companies
incorporate.  Though not primary law or authorative secondary sources,
these sites are highly consistent.  see 
http://www.sutlaw.com/why_nevada.php and
http://www.nvinc.com/nservice12.htm.

You may also want to look at the Nevada Secretary of State web site at
http://secretaryofstate.biz/comm_rec/whyinc.htm.

Your main concern appears to be tax savings.  Incorporating in Nevada
could save you taxes on the state level.

Incorporating in Nevada may provide advantages on other important
issues you also should consider.  These issues include:  (1) the
corporate veil; (2) indemnification of officers and directors; (3)
joint and several liability; and, (4) shareholder privacy.

1.  If the corporate veil holds up, you will not be personally liable
if your company gets sued.

2.  Nevada permits corporations to place provisions in their articles
of incorporation that eliminate the personal liability of officers and
directors to the stockholders of Nevada Corporations.

3.  Joint and several liability means each responsible party is liable
for all the damages payable to a plaintiff regarless of their share of
fault.  However, I believe Nevada limits your exposure to damages to
your degree of fault.

4.  In Nevada shareholders are not a matter of public record and
"bearer" shares may be issued - both of which allow for maximum
anonymity and privacy.

You may also have to invest more time keeping up with laws pertaining
to your overseas corporation than if you incorporated within the 50
states.

I hope this was helpful.

I am not an active member of the bar and the following does not
constitute legal advice but only a starting point for further research