Why do so many companies incorporate in Delaware?

https://thehustle.co/why-delaware-is-the-sexiest-place-in-america-to-incorporate-a-company/

by Garbage • 5 years ago

261 170 5 years ago

Layke11232• 5 years ago

Without even reading, I'm going to assume it had to do with capitalists dodging taxes. Let's find out how surprised I'm going to be. /s

ed25519FUUU• 5 years ago

Wait until you find out how much in taxes the elites pay in communist countries.

Layke11232• 5 years ago

Whataboutism? Are you saying if they do it, it makes it ok for us to do it? What's the difference then?

kingsuper206• 5 years ago

The high GINI scores in the USSR always cracked me up.

The tendency for money and resources (and pretty women I suppose) to pool has never been well dealt with. All large-scale systems for business and government seem to devolve into dogfights over scarcity.

koheripbal• 5 years ago

This is exactly how people reinforce their existing bias.

mrwnmonm• 5 years ago

This is exactly how people treat someone being honest. You don't know what is his opinion after reading the article, so you can't say he reinforced anything.

techbubble• 5 years ago

Well, there's also the bit about not having to deal with a long list of fees and onerous requirements like many states have, when all you're trying to do is start a business, build a product and hopefully find some paying customers.

kingsuper206• 5 years ago

To be fair, you have to wonder what the point of corporations even paying taxes is. I always thought that they should wait until the shareholders or employees actually received money/goods/services from the Borg. In a highly simplified world, 100% of profits are passed through, but then you currently get the issue of dividends being non-deductible (that's true, isn't it?). Odd.

On the other hand, with the Senator from Mastercard running matters, I don't expect to see any consequential changes.

PeterisP2• 5 years ago

The key issue with that is that in this case the shareholders can defer the distribution (and thus the taxation) for multiple decades and potentially forever. If you need to get some spending money/goods/services from the Borg, you can instead sell a small share of the Borg; if you'd want to invest the profits somewhere else, you instead have the Borg invest it there (because that's untaxed in that case), if you'd want to buy a fancy villa you can have the Borg buy it and rent it to you - even at a fair price, the key thing is that you're only taxed on the amount you'd need to extract for rent, but the purchase is with pre-tax money.

If we would wait until the shareholders actually receive the money, it means they have the ability to arbitrarily decide when the revenue will be taxed, so they'll ensure that it definitely isn't taxed now. So the result would be that profits are never passed through until/unless absolutely necessary - or perhaps they can wait out a couple governments until some decades later the rules change.

ghaff4• 5 years ago

Corporate income tax is double taxation--in theory.

On the other hand, as others note, there are so many ways for individuals to defer taxation, for example in the case of 401 (k)s, or even eliminate it in the form of large charitable contributions or other mechanisms. So I'm not entirely opposed to some level of corporate income tax.

Grimm13• 5 years ago

The 175-180k figure for franchise tax is misleading. Our franchise tax as an early pre-revenue company was $450 dollars this year because of one of the methods of franchise tax calculation available.

tomklein• 5 years ago

I guess the author means $175 up to $180,000 instead of $175k as minimum

Grimm13• 5 years ago

The minimum to my knowledge is that $450

rzzzt2• 5 years ago

Is there some advantage of choosing the entity mentioned in the article over its ~100 competitors? I found a list of registered agents here: https://corp.delaware.gov/agents/

arjawn8• 5 years ago

Are you forming a C Corp or an LLC? You'll need a registered agent regardless BUT you shouldn't pay too much for a registered agent!

rzzzt2• 5 years ago

Neither, just found it interesting that the _one_ address always comes up, but you don't hear of the runner-ups (although it seems I have also missed the mention of the other big player that someone quoted from the article).

kube-system• 5 years ago

I am sure that the quality and breadth of services provided by the agents chosen by fortune 500s well exceed the services provided by an agent that is one guy in a garage.

jpincheira2• 5 years ago

It's a state that has services very well streamlined, and it's perfect for C-Corps. For LLCs, probably the best state will be Wyoming.

We recently launched our new company [1] and are deep into helping entrepreneurs getting started mostly in Delaware and Wyoming.

[1] https://startpack.io

vageli2• 5 years ago

What makes Wyoming the best state for LLCs?

jpincheira2• 5 years ago

From our experience, most customers go for Wyoming LLCs because of the cost-effective option of a $50 Annual filing charge as compared to Delaware which has a $300 Annual franchise tax. The option is totally up to you.

We wrote a guide around how to choose the best state for new LLCs [1]

[1] https://www.startpack.io/best-state-to-form-your-llc-in

itake2• 5 years ago

Members nor Managers are not listed with the state

My main issue with out-of-state LLCs though is you typically have to file in whatever state you're operating/living in as a foreign LLC, so you end up with double the paperwork and filing requirements.

IMHO its better, especially for sole-proprietor / pass-through LLCs to just register in whatever state you're living in.

ilovepitchdecks2• 5 years ago

There's no no need to use a formation service. Incorporating a company in the US is very easy and can be done online, even by foreigners. All you need is a Registered Agent and they start at $25/year (in Wyoming).

I'd also like to point out that forming a LLC as a foreigner is a bad idea, as that might make you personally liable for US taxes. Either form a C Corp outright or have your LLC taxed as a C Corp. Then just zero out the profits. Some extra forms to fill out, but still better than paying taxes.

_xnmw• 5 years ago

How does one zero out the profits? Pay yourself as a contractor?

jdhn• 5 years ago

Why would you go to Wyoming, and not Nevada?

arjawn8• 5 years ago

For international LLC owners, Wyoming has lower ongoing annual fees! $50/yr in Wyoming vs $350/yr in Wyoming!

Also I call out international above because if you are a US resident you should form an LLC in your "home state" aka the state you do business in!

tomrod2• 5 years ago

I find efforts to skirt rules and regulations very fascinating.

This reminds me of a discussion awhile back. When interest rates threatened to go negative due to European markets circa 2014-2015, I remember discussing with fellow economists just how negative rates could go. Ultimately, at some negative rate, we figured wealthy individuals would remove their capital from the market and put it in warehouses with armed guards. The maintenance cost would eventually be lower in that approach than to leave in banks (charging higher fees as rates increased) or similar.

Ultimately it was speculative only, thankfully, since capital inflows from Europe to the US kept the rates higher than zero.

Fascinating stuff!

kingsuper206• 5 years ago

Not too different than the concept of precious metals depositories I guess. I don't know what the yearly tithe is in places like Singapore for this service, but one problem would be the physical size of the cash.

Maybe they should reissue the $100k federal reserve note for public consumption.

Denvercoder9• 5 years ago

Ultimately it was speculative only

Not really. In e.g. the Netherlands you've to pay a 0.5% interest rate over the balance above €100k, €250k or €500k at most banks.

Of course most people that hit the cap just spread out their money over multiple banks, use a savings deposit that still gives zero or positive interest, or invest it.

rmah• 5 years ago

Incorporating in Delaware is the exact opposite of trying "to skirt rules and regulations". It is based on the desire for well defined, stable rules and relatively efficient enforcement.

tomrod2• 5 years ago

As would the solution I mentioned regarding negative interest rates.

Both are evidence of competing regulatory systems, which is why I consider it fascinating.

perl4ever• 5 years ago

There's something that's been bothering me for a long time about interest rate policy.

In general, I have the impression that people take for granted that lower rates are "easier" even when they go negative.

However, it vaguely seemed to me that either side of zero should be considered "tightening". The sign determines which way money is going, but the absolute magnitude constitutes the friction.

So I've wondered if negative rate policy was counterproductive.

Does that make any sense at all?

will4274• 5 years ago

a place where corporations could frolic in the open fields of capitalism

Do people like this style of writing?

mdorazio• 5 years ago

Yes. Not everyone shares your preferences.

mixmastamyk• 5 years ago

It made me laugh, is that a bad thing?

codegeek• 5 years ago

TL;DR It is mostly due to the corporate friendly and experienced legal system in Delaware. Not so much about taxes. If you are too small or just starting out, you may be better off incorporating in your local state of residence to avoid overheads. Right?

arjawn8• 5 years ago

For C Corps, correct! But for LLCs my candid thoughts are form in Delaware only if you have plans to in the future convert your LLC to a C Corp (to raise venture capital from U.S. investors) or you really want the "prestige" of saying your company is from Delaware. Some people say this matters to them and if it does, it is your business, your choice! Otherwise, I recommend Wyoming. Why? Wyoming is the most popular state for non-residents who are online businesses, e-commerce businesses, or business owners who want an easy and simple way to form and manage their company. It's the most popular state among https://startpack.io customers, has lower annual fees ($50 vs $300 in Delaware), a low filing fee ($100), and was the first state to ever create the LLC. Also don't sleep on Wyoming's prestige as well :) It has a friendly business environment, also allows you to protect your personal info when filing with the state (use the registered agents info) and has even been called "The Switzerland of the Rocky Mountains" (I don't know who coined this term though haha)

Pxtl2• 5 years ago

So, when a state operates in California but pays its Delaware subsidiary to hold its IP and other intangible assets as a tax dodge, does it not have to pay Californian sales taxes on this purchase?

pwned12• 5 years ago

Sales taxes are generally applicable to the final retail sale of a good for ultimate use, not for transfer of intellectual property rights.

Pxtl2• 5 years ago

I haven't worked on the money side of a business - businesses are allowed to claim an expense for purposes of reducing their income tax burden, but they don't have to pay sales taxes on that same expense if it's internal to an associated business? That seems perverse.

"I spent money on X"

"Okay where's the sales tax payments for X?"

"The money went to myself, so there's no sales tax"

"So then you didn't spend the money?"

"Yes I did."

doktorhladnjak• 5 years ago

I doubt intangible assets are subject to sales tax

IncRnd3• 5 years ago

There would be no difference in IP taxation if your example were 100% in California.

gamblor9566• 5 years ago

A) Yes, it still collects sales tax on the purchase. (Sales tax is owed by the buyer, not the seller). B) The company would still owe CA tax on the revenue from selling the phone. C1) California would disregard the IP royalty, so no deduction for the Delaware shenanigans. C2) Other states will grant the deduction...but tax the royalty on nexus grounds, and the subsidiary won't have apportionable expenses to offset the royalty income, resulting in a higher net tax burden for the corporate group .

lifeisstillgood2• 5 years ago

It's not (just / only) taxes - Delaware has for a century or more not imposed changing rules and regulations on businesses registered in its state. It has basically left things well alone.

If this was outside the USA then Delaware would just be some tiny island tax haven. But it's a full fledged State in the most powerful country in the world. Businesses in Delaware still have to abide by every Federal law and regulation, and every Federal tax. It's not (quite) a no laws, no rules hideaway.

What they don't have to do is guess which State's local problems are going to hamstring them in five years.

Delaware incorporation gets you in the USA market at the national level. National America laws affect you but local State politics you can safely ignore. And be confident that the changes coming nationally will be clearly signalled in California or Texas first.

Yes there is tax arbitrage opportunities - but we are seeing similar things in Netherlands or Ireland in the EU. And when things got too out of hand then the other states would all "have a quiet word" with Delaware. Similar to how the Dutch Irish sandwich is it seems coming to an end.

So yeah, businesses like stability and only having to look in one direction, much more than low taxes but more complex environments.

Edit: It's worth reading up on the Dutch / Irish sandwich. In some ways yes it is egregious (and yeah a lot of the time it is - franchises that claim all the profit resides in a logo or a policy book - we all know that's crap). But that's a question of degrees - if I sell McDonalds burgers I will make more than selling some unbranded stuff. So IP does have value. Now let's say I am licensing wind turbine generators for a wind farm - designed in UK, built in Germany, installed in France by a Dutch company with Spanish investors. Whose laws apply to the licensing agreement ?

This gets really hard really quickly - which takes us back to Janet Yellen and minimum OECD tax rates. By stopping the race to the bottom, it does not matter so much - tax is paid, and gets shuffled in somewhere.

I know I am banging on but, getting outraged by tax dodges like this will prevent us taking the big wins - if there is a global minimum tax rate a huge amount of wasted effort on tax avoidance goes away, and it opens up real possibilities for clamping down on tax evasion.

Companies in Delaware mostly pay tax in the right range - and those that don't, trust me, the way to deal with it is to hire more IRS agents - probably the only branch of Government that has a 4-10x ROI year on year :-)

tl;dr tl;dr

There is an order to fixing taxes either globally or between states. First set a global minimum corporate tax rate (see OECD/Yellan). Then clamp down on tax evasion by forcing beneficial ownership to be made public globally. Only after all that is it worth fighting over who get what cut of the pie. There is no global tax pie right now - we need to bake it before we discuss cutting it.

pbu43• 5 years ago

how shall I put this ... straw chewing hick-town councillors (sorry, State Senators) who think cows made America great.

Considering America wouldn’t exist without food and the hick towns that supply it, and speaking as a straw-chewing hick from one of those towns who I guess manages to smash enough keys together to occasionally write software in your eyes, please do not so condescendingly dismiss the half of the country you clearly don’t understand. We can just as easily dismiss you and your arrogantly narrow view of your fellow citizens. It’s those exact globalist policies you’re trumpeting, and their ideological underpinnings, that forced the very people who feed you into a position where you can comfortably shit on them as you are here.

You didn’t need this classist, obnoxious swipe to make your point, and you absolutely knew that given how you hedged it linguistically (twice alone in my quoted portion). It says far more about you and your beliefs than you think it does that you said it and apologized for it in the same breath.

lifeisstillgood2• 5 years ago

Fair enough.

Changed.

On the other hand, as a European, the very few State Senators I have met / known have been decent honest people - but very focused on local (to the State) issues - or on what I would call global always on politics like decent labour laws etc.

But then again, their very job is to focus on the local.

Hmm, re-reading this bit:

>> It’s those exact globalist policies you’re trumpeting, and their ideological underpinnings, that forced the very people who feed you into a position where you can comfortably shit on them as you are here.

I am not sure I get this part ?

cletus3• 5 years ago

This is a good overview.

I honestly don't understand how these IP transfers are legal and continue to be legal. In the example from this article if the Delaware subsidiary bought the tennis balls from Vietnam for $10m and sold them to the California subsidiary for $80m, this is actually illegal. It's called transfer (mis)pricing. The general principle is that such pricing should be at arm's length. But for some reason it's totally fine for IP.

Not only does this avoid state taxes but it is the basis for big tech companies dodging federal taxes by transferring their IP to Irish subsidiaries and then paying "royalties".

So I'm a big fan of two reforms:

1. Profit apportionment. If 20% of your revenue comes from a particular state or country, that jurisdiction gets to tax 20% of your profit. This whole transfer pricing nonsense has to end and it's the real cause of the race to the bottom; and

2. Much higher property taxes for real estate owned by corporations rather than individuals. Corporate anonymity with real estate is a real scourge and drives speculative bubbles, money laundering and simply parking money in real estate, none of which does anyone any good.

meowkit• 5 years ago

1) How does this get enforced? What stops Ireland, Camans, Monaco, or Luxembourg (note: I am not familiar with the most popular tax havens) from continuing to have low corporate tax rates?

2) How to prevent corporations from paying individuals/employees to manage property? Or giving them a cut?

yokaze7• 5 years ago

2) How to prevent corporations from paying individuals/employees to manage property?

How should managing the property make them tax exempt? Do they transfer the ownership?

cletus3• 5 years ago

What stops [tax havens] from continuing to have low corporate tax rates?

Nothing. But if Apple has $100B (out of $300B), as an example, in revenue in the US then the US gets to tax 1/3 of their income. If other countries decline to do likewise, well that's their choice. But tax havens are a scourge.

We've gone full Ayn Rand here where the people whose wealth was made possible by the stability and infrastructure in the countries they made that wealth in want to avoid at all costs paying for that stability and infrastructure. It's ludicrous and unsustainable.

Eliminating transfer pricing (both IP and non-IP) is a way of avoiding this race to the bottom as globally mobile capital perpetually moves chasing the lowest tax rates and short-term incentives.

yokaze7• 5 years ago

2. I would suggest to have the same tax for everyone, but make it (and rent) deductable to a certain degree, if it is for your primary residence .

Ideally, it should be net-zero for people living there.

cletus3• 5 years ago

So real estate has a number of problems:

1. It's clearly used for money laundering and hiding money from hostile governments. In Europe, this is a huge factor in the London real estate market.

2. Cities die when people can't afford to live in them. This is exacerbated by restricting supply to simply park money. Often the ultra-wealthy buy a place where they'll spend 3 days a year because they like that place (eg NYC). In doing so, they're contributing to making that place worse. This behaviour should have a cost;

3. There are cities around the world that have pockets that are essentially vacant because of (2). Condos in Manhattan have a notoriously low occupancy rate. I've heard Tel Aviv has this issue as well. There are many others;

4. In many places it's more profitable tp produce (unoccupied) ultra-luxury property. A lot of the building in NYC is north of $4000/square foot. That's... insane.

5. Property taxes in NYC, as one example, are highly regressive. a $1m condo may have property tax of $1200/month. A $100m apartment may only incur $16k/month in property tax. The counterargument is that the more expensive apartment uses just as many services. Personally I think subsidizing ultra-luxury property is just bad.

Some jurisdictions (eg Vancouver) have tried to punitively tax "non-working" real estate, which is to say real estate that sits vacant. I don't think this has had much impact and it's probably really easy to game (eg rent it out to a family member notionally).

My philosophy is that:

1. Ultra-luxury properties are generally speaking bad for a city. They take up a disproportionate amount of space and tend to add nothing to the city. It's fine that they exist but we shouldn't be subsidizing their construction and continued existence;

2. Providing rental units for people who live in the city is a better use of capital than parking foreign money. As such, both parking money and foreign investment should be taxed at a higher rate. Local landlords are better than remote landlords (since those local landlords are part of the city).

Personally I think that if you own property in NYC, for example, then the state and city of New York gets to tax your income as if you were a resident. LLCs to hold property are the obvious dodge so these need to be taxed punitively.

thaumasiotes4• 5 years ago

Profit apportionment. If 20% of your revenue comes from a particular state or country, that jurisdiction gets to tax 20% of your profit.

There's already a local tax on revenue. Sales tax.

Retric2• 5 years ago

Sales tax isn’t collected on components of products. So an apple farm sells apples to a factory without any sales tax etc.

Taxing on point of sale is very useful if you want to capture externalities, but it’s got minimal effect on the supply chain.

ac292• 5 years ago

Sales tax is not a tax on revenue, its a tax on purchases (paid by the purchaser). Perhaps you are saying business taxes should be non-existent, but in most places they do exist.

Also, dont confuse revenue and profit. While some locales do have a gross receipts tax, taxing profits is much more common. This, in theory, incentivizes companies to pay out their revenues in the form of wages, R&D, building things, etc.

gamblor9566• 5 years ago

The tax strategy in the article (aka the "Delaware Loophole") doesn't actually work to avoid state taxes. In fact, the "Delaware Loophole" as it was called has not worked in most states for decades. (As another commenter noted: the sole example given of this loophole was a miserable failure. The Toys R US group ultimately ended up owing more money to South Carolina after its maneuver than it did before. https://casetext.com/case/geoffrey-inc-v-south-carolina-tax-.... )

Two reasons the "Delaware Loophole" doesn't work:

1) In most states, related companies are treated as a unitary group for tax purposes. (See for example, California.) This means that generally, intercompany transactions between the related companies are treated as not existing for tax purposes.

2) In states which don't have unitary group methods, they simply tax the IP lease itself on nexus grounds, as South Carolina did in the Toys R Us/Geoffrey case (Geoffrey LLC was a subsidiary of TRU that existed solely to lease the TRU IP). TRU's IP-expense deduction in South Carolina ended up being fairly small, after taking into account their low profits, so SC simply granted the deduction to TRU...and decided to tax Geoffrey on the IP lease on nexus grounds. Unfortunately for the subsidiary, they had no expenses apportionable to South Carolina (which is usually the case for IP holding companies), and so all of the lease was taxable in South Carolina. The TRU group ended up paying significantly more in taxes to South Carolina after attempting the Delaware loophole than it did doing things the honest way. (And this result was predictable from the very beginning based on the nexus laws even as they were back then, which is why companies don't do this within the U.S.)

Edit:

On your proposal #1: this is how income taxation generally works in the U.S. States already get to tax a company's income earned in the state, so long as (a) the company has a physical presence in the state or (b) isn't physically located in the state but does enough volume or revenue in the state to justify imposing tax. (See "nexus").

At least in the U.S., the real game is about how to apportion expenses to a state. Every state uses a different formula, and some, like CA, let taxpayers choose the formula most beneficial to them. (Note: apportionment is nothing like transfer pricing.)

Outside of the U.S.: If a business earns 20% of its revenue from directly Country A, then taxability is not a transfer pricing issue, it's a tax treaty issue. But you presumably mean the following: a big (foreign) business sets up a smaller business locally, and "leases" that IP to the local subsidiary, reducing the profits (and thus tax) the smaller company pays to the local tax authority. In that case, there isn't really anything the local country can do, because the situation is no different than the case of Unrelated Local Company A licensing an IP from Big Company in Other Country B. Many countries wouldn't allow that sort of tax discrimination based on company ownership, and in the countries where it would be allowed, foreign investment would drop precipitously because it would be riskier and less profitable to do business in that country.

CivBase• 5 years ago

Loopholes like this are why I balk when any politician talks about raising corporate taxes. I agree that businesses should pay more, but until loopholes like this get plugged I don't believe it will do any good. At best it's a way to placate voters without accomplishing anything of value. At worst, it can make our horrifically complex tax code even more complex, making it even easier to hide loopholes.

tomschlick• 5 years ago

Its the same thing with the upper tax brackets. People point to the 50's and say "look we taxed the rich at a much higher rate!!1" but what they miss is that there were so many loopholes that the rich didnt pay anywhere near that rate.

Loopholes are the lifeblood of corps / billionaires. No one will fix them though because thats where their campaign contributions come from.

bigfudge• 5 years ago

In the UK at least this isn’t actually true. The studies done use tax records to estimate effective tax rates, not just published tax rates.

toyg3• 5 years ago

The rich paid more in the ‘50s, because the alternative (the USSR) was worse. Moving money was slow and risky; if you parked your cash in a friendly Caribbean island, there were no guarantees that tomorrow that island would not see a Moscow-backed revolution and your stash would go up in smoke.

Nowadays the world is largely stable. Running conflicts are largely ethnic in nature, hence limited to specific areas. Capital is welcome everywhere, and you can move money in and out of a country with a click. So it makes sense for the rich to shop around, like we do when buying insurance through a comparison website.

tzs• 5 years ago

In Delaware, there are 2 huge registered agent firms:
CT Corporation (1209 Orange Street) is home to 285k+ businesses, including Walmart, Apple, and Coca-Cola

Apple may be using that firm for something, but Apple is not incorporated in Delaware. Their state of incorporation is California according to their SEC filings, and has been since at least as far back as 1994.

jagger27• 5 years ago

It seems the only mentions of Apple being incorporated in Delaware are from news articles and infopieces like TFA, no actual documents showing they are.

ghaff4• 5 years ago

It doesn't seem to be the case. From their last 10-K: "The Company is a California corporation established in 1977."

djcapelis• 5 years ago

Apple has state based branches registered in many states that it does business: https://opencorporates.com/companies/us_ca/C0806592/statemen...

These are so irrelevant to the California corporation that Apple has argued in court that there’s no corporate nexus in Delaware and so litigation there is not a valid venue: https://finance.yahoo.com/news/judge-single-apple-store-make...

It didn’t work, but the ruling was based more around the existence of a retail store there than anything else.

evancox100• 5 years ago

Yes, came here to post this. No evidence that Apple is incorporated in Delaware. How many other companies did they get wrong?

bradleyjg• 5 years ago

A lot of people getting hooked on the tax part, some on the anonymity part, but don’t underestimate the friendliness of Delaware courts to boards of directors. Things like staggered boards, share classes with extraordinary rights, poison pills and so on have all easily passed muster in Delaware and might well not have in a different state.

arjawn8• 5 years ago

Have learned a ton about LLC formation in Delaware + other states from working on https://startpack.io.

tl;dr if you live in the US form an LLC in your home state, if you don't Wyoming is a very popular option for online, digital businesses / ecommerce businesses, and Delaware is so popular because, in my opinion, it has "prestige" but as an international resident, you won't automatically get tax savings by being in Delaware vs Wyoming for example (if you don't have a physical presence in the US)

If you live in the US -> form an LLC in the state you live in. If you form an LLC outside of your home state you’ll be required to register that out-of-state LLC as a Foreign LLC in your home state. For example, if you form an LLC in Nevada (but you don’t live there), then you’ll be required to register that Nevada LLC in your home state (as a Foreign LLC) in order to do business in your home state. This means you now have 2 LLCs (one in Nevada and one in your home state) so you have to pay 2 State filing fees and 2 Annual report fees

If you don't live in the US -> you can form in any state. If you are an online digital business Delaware and Wyoming are the two most popular states.

Delaware is the most popular state in the US for business formation. I think part of this is because of 1) the prestige of creating a "Delaware C Corp" in the state and 2) it does have a very solid business reputation. However if you are an international, online business, Delaware might not be the best option if you are trying to save $. In Delaware there is a $300 annual payment due to the state each year.

Wyoming is extremely popular for LLC formation for international residents because of the lower ongoing annual fees ($50 vs $300 in Delaware). Wyoming has also built a reputation as one of the most popular state for non-residents who are online businesses or e-commerce businesses. Also dont sleep on Wyoming's prestige as well; it has a friendly business environment and has even been called "The Switzerland of the Rocky Mountains."

Again the thing here which is important to highlight is you end up creating twice the work / twice the costs if you live in the US and form an LLC outside of the state you "do business in" so be careful here!

And internationally, if you're forming an LLC, you can choose any state and if you don't have a physical presence in the US, you actually might not have a US tax filing requirement, but you do have an informational filing requirement if you are a foreign owned US Single Member LLC (Form 5472/1120). If you are a foreign owned multiple member LLC, you file a partnership return. And if you are an LLC that elects to file as a C Corp you file a C Corp return!

throwaway483284• 5 years ago

informational filing requirement if you are a foreign owned US Single Member LLC (Form 5472/1120).

Lets say hypothetically someone operating IT consultancy service didn't know about that requirement, is running company 5+ years, has EIN, paid LLC Delaware annual tax but never filled those forms.

1. What in that kind of hypothetical scenario should that person do?

2. Does the penalty for not filling it would affect that person LLC only (as disregarded entity)? so basically he would not be personally liable ?

3. Does your site offer filling those forms as a service?

arjawn8• 5 years ago

Great q, I can see if a CPA in my network has a good answer to this (feel free to shoot me an email, link in bio, with more context as well)

And yes we can help with these filings but the circumstance above where a previous filing wasn't completed is an interesting case so will have to see what the best option is give that!

djoldman• 5 years ago

It seems like there are many situations where a company is definitely following all laws and is extracting value or relative value by making certain decisions that have tax or other advantages.

It also seems like the general public directs outrage or anger at these companies in response to these decisions.

Why the anger at the companies and not the lawmakers who made the system in which the companies are legally operating?

Is it difficult to look up who moved the laws forward? Is it just because it's easier to point fingers at a company?

tenebrisalietum• 5 years ago

Here's how I think the average joe sees things. Most people here may not fall into this category, but certainly know people who do:

A) Politicians only listen to money; even ones that are on your side; laws therefore are skewed towards those who have money.

B) Companies donate large sums of money to politicians; therefore they listen to companies.

C) Very rich individuals also donate large sums of money, but the average joe can't figure those names out on their own and will rely on rumor mills from social media, and media propaganda from his/her political tribe.

So people will get mad at companies first because they are more visible and the fact that it's more possible for a non-rich person to get people to stop spending money at a corporation than making a lawmaker do what you want.

artem247• 5 years ago

There are many levels to this but generally there is an idea that politics and especially laws like these are shaped by those who benefit from them the most - big businesses who can afford lobbying.

In terms of theory there is a Marxist notion of 'ruling class'. In regards to capitalism Marxists think that ruling class of capitalism is big business, not the State itself. Politicians are in a weaker position and just implement the will of the captains of the industry. That is rather extreme notion but still one can see traces of it in society.

And it generally goes both ways - companies have poor (but legal) working conditions and oppose any legislation or action that would change it by being anti-union, by funding thinktanks that do studies that prove raising minimal wage would lead to overall decrease of jobs etc.

jokethrowaway2• 5 years ago

What can you do about politicians?

They're all sell-outs. When election time comes you vote your side, hope the other side doesn't win and then spend the next for year ignoring what your guy is doing or criticising what the other side's guy is doing.

Sure, you could vote the libertarian party, good luck going higher than 3%. Even if they were successful, what are the chances they won't become as corrupted as other politicians once they have the power?

In the last 200 years the USA government just got bigger and inequity has just increased.

Forget about politics, accept the leeches as part of life, joke that "Two things are unavoidable: death and taxes".

You can at least boycott large companies and stop purchasing their goods.

lmeyerov• 5 years ago

We are a pretty normal delaware c corp . If optimizing for not paying taxes, we'd probably focus on states like Texas, and divest from anyone and anything in California, but we haven't.

Bigger than our taxbill is our accountant, lawyer, etc bills, and in turn, their jobs get easier with delaware: they know it & it doesn't change as much as say California. More than taxes is day to day like big multiparty contracts , equity management, and more existentially, potential m&a. delaware law isn't federal law, but everyone knows it and follows it, so close enough.

it might feel expensive to start and maintain, but probably isn't when you look back at your actual costs. in addition, legal counsel will pressure you to reincorporate if you don't, which would be a double cost. would be my default choice if doing it again: only want to innovate in so many things, and unlikely for this to be one of the most important areas of the business to be extra clever on.

gamblor9566• 5 years ago

Also, since the Wayfair decision, pretty much any interstate income is taxable where the customer is located if you do enough business in that state (usually an income threshold, but in many states its a number-of-transactions threshold).

Locating in Delaware literally saves you nothing in paying taxes; indeed, it actually costs a tiny bit more, tax-wise, than locating in your primary state of business.

But on the note of other compliance expenses: being incorporated in Delaware increases your compliance costs. You're now subject to suit in Delaware and whatever states you actually do business in (including especially whatever state your HQ is located in). So, for example, you don't avoid exposure to CA law if you have CA customers (and many state consumer protection rights can't be waived by a ToS or by a signed contract). And you don't need to be incorporated in Delaware to include a jurisdiction clause in your B2B contracts.

Delaware is useful in the limited situation that you are a corporation with a complicated capital structure that needs a management-friendly, shareholder-averse court system.

D13Fd• 5 years ago

The Delaware Court of Chancery is among the best in the world, if not the very best, and Delaware’s corporation law is extremely well developed, far ahead of most other states.

When they teach corporation law in law school, they usually teach Delaware law. It’s the most advanced in the country.

kahirsch• 5 years ago

Could you be a little more specific about what you mean by "best" and "most advanced"?

gamblor9566• 5 years ago

It's neither the best, nor the most advanced. It has two centuries of law pretty much focused on upholding management at the expense of all other parties' interests (including non-management shareholders).

Today, most new companies form as LLCs, which are regarded as the "most advanced" form of business entity for legal and tax purposes. In that regard, Wyoming is generally considered to have the "most advanced" law because many governing LLC concepts and regulations originate there first.

praptak2• 5 years ago

Tax havens are parasites on tax systems of other countries but tolerating a similar shtick within a single country is a separate level of fucked up.

ipaddr• 5 years ago

Corporate tax havens, income tax havens, property tax havens, sadles tax havens are all part of the one side of this system. On the opposite side you have over serviced areas, daily door to door mail delivery, public transit, universal health care all available in over taxed havens.

The federated nature of united states allows each state to set different tax rates / service levels. These states compete with each other to attract people / capital.

The nature of how the system works means tax havens are not parasites. They are part of an ecosystem system that competes. The freedom to make those changes is what makes them successful over a system who would limit that.

On the country level its more extreme with currency havens.

VWWHFSfQ• 5 years ago

Do you consider places like Texas and Florida to be "tax havens" because they are increasingly attracting more and more people to move there from places like California and New York for personal tax advantages?

praptak2• 5 years ago

Only to the degree to which those people avoid taxes on money that they actually make in other states.

marktheknife• 5 years ago

The tax part is pretty inaccurate. If you use business IP and transfer it to Delaware you will not avoid California tax on income from that IP. The unitary business and formulary apportionment approach of California income tax (also the dominant approach of multistate income tax in other states) easily beats that strategy, by treating formally separate entities as one for taxation. The sort of income shifting described in the article works better in international taxation since there the dominant approach is a “separate accounting” aka separate entity approach.

Indeed, even the Geoffrey case the article notes is famous for Geoffrey losing in South Carolina, and having its income taxed in that state.

Nonbusiness income is taxed to commercial domicile, which does promote moving headquarters to a tax haven. But much less income is considered nonbusiness income than you’d expect, and further commercial domicile is a separate concept from place of incorporation.

By far the dominant reason for Delaware as a corporate place of incorporation is its well developed corporate law and courts. It is more favorable to corporations in part, but not excessively so—VCs would not be pressuring corporations to incorporate in Delaware if it purely screwed shareholders at the corporation’s benefit.

There are also estate planning and asset protection benefits of using Delaware (and certain other states) LLCs.

jawns2• 5 years ago

Exactly right. I'm a Delawarean, and in my former career as a journalist I wrote about this phenomenon. It's all about the courts. It is a risk mitigation strategy for businesses. Having extensive, well-defined case law makes things more predictable.

toyg3• 5 years ago

One of the peculiarities of the US is how you guys managed to effectively bootstrap industrial districts at continental level for the weirdest meta-stuff, from newspapers to movies to corporate accounting.

vmception4• 5 years ago

Wyoming has had a Court of Chancery for several years now too

They and any state could always lean on Delaware case law

And if you don't like Delaware established precedent then you can argue for the opposite in any other state (like Wyoming) where the judges are less bound to the established case law

Delaware is overrated

The race to the bottom never ended and is much larger than a collection of states, it is international with many permutations and many legislatures interested in attracting business, because they're a business too

tomcam2• 5 years ago

Check out parent’s profile. Wish these books were around when my kids were young

JumpCrisscross3• 5 years ago

well developed corporate law and courts

To put this into context, the average time in 2020 for a civil case to go from filing all the way to an appeal to the Delaware Supreme Court was 185.8 days; from submission to the Supreme Court, 32.8 days [1].

California’s courts don’t publish this information regularly, but the last time I checked, the comparable statistics were 3 years and one year.

[1] https://courts.delaware.gov/aoc/annualreports/fy20/doc/2020S... page 8

supercanuck• 5 years ago

It is actually simpler than this, and that is it is extremely difficult to pierce the corporate veil in Delaware. It is considered one of the strongest states for segregating the officers and shareholders except in cases of outright fraud.

rsj_hn• 5 years ago

Yup, this article falls squarely in the "misinformation" category, and the author has no experience with tax law, nor does he cite any authorities to support the tax avoidance thesis. He's just winging it, improvising, about corporate tax law. It's crazy how low journalistic standards have fallen as the line between news article and "personal blog" has been blurred.

I am not ascribing ill motive to the author. Just incompetence in trying to write about a very complex topic that is far out of his depth, and doesn't allow for simple moralistic summaries like "Big biz not paying their fair share!".

IG_Semmelweiss2• 5 years ago

I don't disagree, but the website URL is called "the hustle".

I don't think it would be far fetched to think that the content should be viewed with a healthy dose of skepticism ?

dheera• 5 years ago

For the number of corporations that register in Delaware, why aren't Delaware's streets lined in gold?

I dropped a few Google Street View pins randomly around Delaware and it looked pretty dated to me. Schools that look like jails, houses made of wood, potholed roods, narrow non-ADA-compliant sidewalks, and hardly any modern shiny train service. Aren't they scooping up trillions in taxes? Why aren't they building the next Shanghai/Silicon Valley/Singapore/whatever with that cash?

It's really hard to believe from Street View that this is the place where big corporations are registered.

https://i.imgur.com/FP3XZtx.jpg

IG_Semmelweiss2• 5 years ago

There is a long line of countries that found black gold (oil) in the 70's, such as Venezuela , that are since economic basket cases.

Or take some African countries with Diamonds.

My point is that because you have a revenue source / competent niche, that does not guarantee a competent government. Usually the only thing you can guarantee is that unplanned riches or resources will lead to waste and corruption. Its not an accident that the norwegian sovereign fund is an rarity, not a rule.

I am curious if there is a genesis to the level of crime and abandonment so pervasive in DE.... from the success DE enjoyed early on, via corp registration riches.

AngryData• 5 years ago

The exact kind of thing interstate commerce law exists. And yet we instead fraudulently use it for the war on drugs and restricting what can be produced and sold in-state.

dmckeon• 5 years ago

Delaware is not the only US state that has tuned its laws to attract certain types of business and financial activity:

https://www.theguardian.com/world/2019/nov/14/the-great-amer...

notriskfree• 5 years ago

Because so many large American corporations; are heavily involved with Farming chickens.

AndrewKemendo• 5 years ago

Here's the simple answer for startup founders (at least when I was raising money in 2014-2015):

Institutional VC won't take you seriously otherwise

divbzero• 5 years ago

For founders seeking VC funding, the “simple answer” accidentally omitted above is: Delaware C corporation.

loosetypes• 5 years ago

I’d recommend the book Moneyland.

The focus is more on international, rather than inter-state, arbitrage of legal systems by persons/corporations but is there really that much difference between the rationale for putting an HQ in Dublin and incorporating in Delaware if the goal is selectively operating under favorable legal frameworks?

Bonus, I’d never put together that offshore is just a socially acceptable alternative for the word pirate a la pirate radio.

LeonM2• 5 years ago

I did YC startup school (twice, actually), and one of the first courses was about the legal aspects of setting up your company. The talk basically said "just register in Delaware", without explaining why.

For me as a European (and many other non-US founders in my SuS group) the course material was basically useless. But we did have a good discussion afterwards on loopholes, and why they exist in such way in the US.

As I understand it, Delaware is what Dublin is to Europe.

pottertheotter• 5 years ago

I'm not sure what country you're from, but do you feel that there are less tax loopholes there?

LeonM2• 5 years ago

I'm from the Netherlands. I don't know much about tax loopholes though.

I do remember reading about some loophole possible through the Netherlands, called the 'Dutch Sandwhich' [0] hence why there are supposedly a lot of companies with just a postbox address in Amsterdam (we call these 'postvakbedrijven' in dutch). Not sure what the extend of this loophole is, or if it is still possible to exploit.

I wouldn't bet my company on it though, I prefer just to pay tax in my own country. I see it as my contribution to society.

[0] https://en.wikipedia.org/wiki/Dutch_Sandwich

jokethrowaway2• 5 years ago

I'm always blown away by how high taxes are in the USA.

A federal corporate tax of 21% - and states can tax you even more? Meanwhile you can incorporate in Europe paying 10% (or 5% in Malta, if you setup a holding company, or 4% in Canary Islands if you invest 50k-100k and hire 3-5 people). The UK is taxing companies at 19% (even if it's due to increase to 25% to cover COVID's expenses).

rebelidealist• 5 years ago

Furthermore, dividends are double taxed again at 20%

pyb• 5 years ago

0% in Estonia if you don't distribute the profits as dividends.

paxys• 5 years ago

Most of the stuff in this article is misleading or straight-up wrong. Delaware isn't a tax haven, and most companies will see zero tax benefit from incorporating there.

The reason they do so is that Delaware corporate law is now the de facto US corporate law. Lawyers, auditors, tax professionals etc. all study Delaware's codes in school, no matter which state they come from. The entire ecosystem is extremely mature and up to date. Most other states on the other hand don't even recognize modern corporate governance. Try resolving a conflict between founders/investors about voting rights, class A vs class C shares, bylaws etc. in a court in North Dakota or Mississippi.

Delaware is, for better or worse, the corporate law version of silicon valley. Unless registration and regulation of corporations starts happening at the Federal level (which is unlikely), it will continue to be so.

commandlinefan• 5 years ago

Just FYI, Joe Biden was a Delaware senator from 1972-2008.

anitil• 5 years ago

As often happens, Planey Money has an episode on exactly this [0] (from 2016, so could be out of date). There's also some followup episodes at the bottom of that link.

They even name their company 'Delawhoo', which I think is quite charming

[0] https://www.npr.org/sections/money/2016/03/16/470722656/epis...

Why do so many companies incorporate in Delaware?

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