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U.S. Corporation or LLC: Company formation in the USA
- US State Income Tax For Corporations
- Company formation usa: DTAs – Services US INC
- Tax planning via a network of international tax advisers and attorneys
- Why form a company in a foreign country with a tax accountant specialized in international tax law?
- Basic Considerations regarding the Formation of Companies in „Zero-Tax Havens“ i.e. in countries that have not entered into Double Taxation Agreements with other countries
- Offshore Company Formation: Tax haven rankings
- Download all Company Information
- Parent companies and their subsidiaries in the European Union
- OECD: Articles of the Model Convention with Respect to taxes on income and on capital
- Beware of cheap founders!
- Information about the company formations in English
- Basic considerations within the framework of international taxation
Company formation USA: U.S. Corporation
What is a U.S. corporation and what can it do?
A U.S. corporation is a legal entity with the same legal powers, rights, privileges and liabilities as a natural person and as such may own, buy, sell and inherit property and conduct any kind of lawful business domestically or world wide. It can serve as a parent, affiliate, or subsidiary company, as a holding, consulting, or trust company. The corporation is owned by its share holders and is governed by a board of directors, appointed by the share holders. The board of directors appoints the officers of the corporation, normally consisting of a president, a secretary, a treasurer and one or more vice presidents. The owners (i.e. shareholders), directors or officers cannot be held liable if the corporation fails or is sued for damages by another person or corporation.(However, it should be noted, that the corporate structure will not protect individuals from the consequences of any criminal action.)
Does a U.S. Corporation have to have paid-in capital?
In many U.S. states – just as in European countries – a certain amount of capital is required for the formation of a corporation. Since this is usually not in our clients’ interest, we only incorporate in states without a compulsory paid-in-capital requirement.
Can a U.S. corporation be active in Europe and be registered with the authorities in European countries?
In accordance with various treaties between the USA and western European countries, corporations from the treaty countries must be mutually recognized. We won’t bore you with the text of over twenty treaties because of their similarity to the German-American Friendship, Trade, and Shipping Act of October 29, 1954, which states the following: “The legal status of U.S. companies that are established in accordance with the laws and regulations of one of the contracting parties and qualify as companies of this contracting party, is recognized in the territory of the other contracting party” (Bundesgesetzblatt II (1956), pp. 487-500). Furthermore, in the de la Hague treaty of October 5, 1961, the USA and all western European countries agreed on the recognition of official documents accompanied by an apostille issued by the appropriate state authority. Therefore, the Articles of Incorporation, Certificate of Incorporation (or Certificate of Good Standing) of a U.S. corporation must be recognized in Europe, even in tightly regulated Germany (Bundesgesetzblatt II (1965), page 875). Thus, your U.S. corporation (just as any domestic company) can be legally registered in any treaty country. Nevertheless, since a U.S. corporation is unrestricted in its area of operation, a registration in Europe may not be necessary and might even be undesirable. If you are primarily concerned with income tax reduction, it might be better if you did not appear as the official owner, but rather as the agent or business partner of the corporation. We could appoint you the ‘Assistant Vice president of European Operations,’ a position which does not need to be registered officially in the U.S. Yet, with a notarized power of attorney, provided by us, you would have full authority to run your corporation.
What are the advantages of a U.S. corporation for Europeans or other foreigners?
Are there different kinds of corporations?
The following major corporate structures exist under U.S. law:
- Close Corporation (limited number of shareholders)
- Open Corporation (unlimited number of shareholders)
- Public Corporation (can sell shares on the exchanges)
- Non-Profit corporation (such as churches or schools)
- Professional Corporation (for professionals such as lawyers, doctors, architects)
For tax purposes, the Close and the Open Corporation can be categorized as either a C-Corporation (income is taxable to the Corporation) or an S Corporation (income is taxable to stockholders) However, please note that non-U.S. residents are not permitted to own S Corporations. For non-Americans, only these corporate forms are permitted:
- Close Corporation. Because of its restrictions (for instance, a shareholder cannot sell his stock to outsiders unless it has first been offered to the other shareholders), a close corporation is generally only recommended for small businesses with few owners.
- Open Corporation. Perhaps the best corporate structure. There are no limitations on the number of shareholders or re-sale of stock (though not to more than 35 investors within the USA, without state and federal registration), and it is possible to eventually transform into a public corporation. An open corporation can issue shares of stock with either a par value (pre-determined dollar value) or a no-par value (shares without a pre-determined dollar value) or ‘preferred stock.’. It should be noted that while the issuance of ‘bearer shares’ is now illegal in the United States, owners of corporate stock may remain anonymous in those states recommended by us. The identity of its stock holders is known only to the corporation itself and does not need to be registered with the state of domicile.
- Public Corporation. Structured much like an open corporation, except that the company shares are bought and sold on the various U.S. stock exchanges such as the New York Stock Exchange, NASDAQ, American Stock Exchange, the regional exchanges, or the OTC (over the counter market). Companies like Coca Cola, IBM, General Motors and McDonald’s are typical public corporations.
How can a non-American manage a U.S. corporation?
A U.S. corporation is managed by its officers consisting of the president, the secretary/treasurer, and any number of vice presidents. The officers are appointed by the board of directors. The board of directors consists of at least three directors, one of whom is the chairman of the board. The board of directors is responsible for the policies of the corporation, which are then implemented by the officers. The members of the board of directors are elected by the stockholders of the corporation. (Neither the officers nor the directors have to be American.) Thus, the approach is very democratic. However, in order to save you from having to hire an unnecessary number of employees for your corporation, we only form corporations in those states which permit a single person to hold all positions simultaneously.
Can I remain anonymous as the owner of a U.S. corporation?
In the states recommended by us, the owner (i.e. the shareholder) of a corporation does not need to be registered. Only the founder (i.e. we) and the directors and officers are registered with the state. If you wish to remain anonymous, you can simply engage one of our employees to act as the figurehead president of your corporation. (By the way, the use of so-called pen names, recommended by uninformed incorporators, is dangerous nonsense, since it is illegal in all states (including Delaware) to sign official documents with a fictitious name.)
What name should I give my corporation?
With a few exceptions, you can use almost any name, as long as it is not already taken. It must also be clear from the name that a corporation is involved. For this, the designations Corp., Inc., Ltd., and Co. have the same meaning. In some states even the abbreviations AG or SA are permitted. However, not all names are permitted in all states. For example, names such as bank, banking, trust, bancorp, insurance, securities, attorney at law, hospital, and university can usually not be used. Nevertheless, there are exceptions to this. Please check with us first. You can -but do not have to- use a name from your profession or type of business (or even use your domestic name). In case you want to use the corporation for leasing, financing, or consultation, you might select a name that contains the word “leasing,” “financial,” “investment,” or “management.” These names can then be combined with a proper name or a city name, such as “Northern Leasing, Inc.” or “Dallas Investment Company.” Here is an example of three groups of names that can be combined together:
- A proper namesuch as Detroit, New York, Nevada, Montana, Western, Southern, Eastern, Rocky Mountain, Pacific, Atlantic, International, etc., etc.
- A name of an industrysuch as Financial, Consulting, Investment, Credit, Leasing, Engineering, Software, Development, Mining, Construction, Interstate, etc., etc.
- A business entity name,such as Corp., Corporation, Enterprise, Association, Alliance, Federation, Society, Institute, League, Industry, Syndicate, Union, Group, Council, etc., etc.
(If you were to choose the first name from each group, the corporation would be called Detroit Financial Corp. Naturally, there are many more possibilities. We will be happy to assist you in selecting a name.)
I am not familiar with U.S. laws. Who will prepare the necessary documents for me and help me with legal advice?
Since a corporation exists only by charter and continuing corporate resolutions, it is extremely important that all corporate laws and regulations are rigidly observed. Therefore, our corporate attorneys will advise you on how to stay under the protection of the corporate veil, assist you in managing your corporate books and draft the necessary documents for certain undertakings of your corporation such as: Notice & Minutes of Annual Shareholders & Directors Meeting, Director’s Resolution Changing Address of Corporation, Stockholder’s Resolution Removing or Appointing President, Director’s Resolution to Negotiate Contract, Director’s Resolution for Sale, Purchase and Lease-back of Real Estate and other Corporate Property, Stockholder’s Resolution for Approval of Purchase of All Assets of Designated Corporation, Director’s Resolution Approving Merger with Wholly-Owned Subsidiary, Director’s Resolution for Declaration of Stock Dividend, Director’s Resolution Authorizing the Loans to Officers or Associates, etc., etc. The costs for providing you with these legal services are included in the annual fees for your corporation insofar as the requested legal advice and documentation pertains to the governing of your corporation. However, you may feel free to retain one of our attorneys to take care of any additional legal services you may require. Our clients are typically interested in either SEC approval for the sale of shares on the OTC and other exchange markets, or aircraft trusts for legal holding of an FAA license, trademark applications or official name changes of personal names by a U.S. court and similar legal services. Fees for these services are generally charged against a retainer at an average of $250 per hour, depending on the type of case. Fees for our corporate services are listed in this brochure. Since our attorneys and members of our staff are specialized in their various areas of expertise, you will always be able to find the appropriate assistance.
Which U.S. state offers the greatest corporate advantages for foreigners?
This is an important question, since many states of the U.S. offer no advantage over European countries and have legislation that is so outdated, that a new business start is almost impossible. However, since there are probably as many dissimilarities in state laws between the different U.S. states as there are between Belgium and Belize, you as a non-U.S. citizen incorporator, have an important advantage over domestic incorporators, because unlike many old and established businesses in the U.S. who are doomed to remain in the high-tax States such as New York or California, you still have a choice of domicile. Because of the significant differences between the business laws and tax rates of the various states (of which the legal modifications are continually and very critically monitored by our attorneys), we recommend that corporations be set up only in those states of the U.S. whose laws permit the following conditions:
- A single person must be able to act as the sole director and officer of the corporation (most States require six persons: Three directors plus President, Vice President and Secretary/Treasurer).The ability to wear the hats of the directors, of President, of VP and of Secretary as a single person, is of paramount importance to any sole corporation owner (sole owner of the corporate stock), who does not wish to take on partners or unnecessary employees.
- The owners of a corporation must be able to remain anonymous. While the officers and directors of a corporation have to be disclosed to the state of domicile, there must not be a disclosure requirement for the share holders of the corporation.This is not necessarily possible in all states of the U.S., as in Alaska, for example. Alaska seems to be very favorable at first, since it has no income tax, but it is nevertheless unsuitable for foreigners who want to remain anonymous, since there, all foreigners that own more than 25 % of the stock of a corporation must be registered with the state.
- The state must allow a clause in the articles of incorporation indemnifying the officers and directors against claims for liabilities and obligations of the corporation except in cases of fraud or knowing violation of the law.
- Capital investment must not be required.Many U.S. states, like most countries worldwide, require proof of a capital investment before a corporate charter is issued. This is unacceptable, and we only form corporations in states, where our clients cannot be forced to submit proof of capitalization. Once the articles of incorporation and bylaws, as drafted by our attorneys, have been registered with the state, our clients must have the ability to immediately commence doing all business as provided for in the articles of incorporation and to purchase, dispose or negotiate assets and capital stock up to the amount allowed in the bylaws and to register the corporation in other countries of the world without having to submit proof of paid-in capital.
- Personal presence of the incorporator must not be required.America is a beautiful country, but a visit just for setting up a corporation should not be required. It should be possible to clarify all necessary details by fax, telephone, or airmail. For this, we have even set up toll-free numbers in Germany, Austria, Switzerland, and Liechtenstein through which you can discuss important questions with us at any time, without it costing you a cent. However, in case you want to come to us for a one-on-one discussion in order to conclude a transaction or you just want to “size up” your American business partner, we would be very happy to have you visit us. Since we are located in a suburb of Sacramento, you should plan your flight either to Sacramento or San Francisco (two hours by car). We will be happy to assist with your accommodations.
- The State should have a pro-business climate with few restrictions and regulations on the conduct of business and a modern business legislation.This requirement is obvious. What good is it to incorporate in the U.S. if conditions are no better than at home.
- The state should be income tax free, should levy no sales-, trade-, inventory-, inheritance-, property-, franchise-, use-, or value-added taxes, and the annual corporation fees should be less than $2,000.
While this may sound like a Santa Claus wish list, there are actually some U.S. states which meet one or several of the above criteria, although sales taxes are only paid by purchasers of merchandise and would not concern you, nor would a property or use tax concern you, if you have no property in that particular state. More than likely, you will probably be interested in a state which has no income taxes. However, even if the state which best meets your corporate needs does have an income tax, we can simply establish an additional address for your corporation in Nevada which has no income tax. Thus, as long as you don’t do business in the state of incorporation, you still pay no state income taxes.
So, which is the ideal U.S. state?
Although all 50 states meet one or more conditions on our wish list, only the following states correspond to the conditions one hundred percent: Nevada, Montana, Oregon, Utah, Florida, and Texas. For jumbo corporations (i.e. corporations with more than $100 million in capital stock) the states of Mississippi, Illinois, and Indiana can also be considered. In case especially rapid action is important to you, Utah, Oregon and Montana are to be recommended, since we have attorneys located in the capital cities of these states. If you are concerned about being free from state income taxes, the states of Nevada and Texas are to be recommended, although the income tax in the other states can be avoided by setting up an additional address in Nevada, which has no state income tax.
How much does a corporation cost in these states?
Please request our free information handbook (available in English, German or French) containing a complete schedule of fees, because incorporation and/or state franchise fees vary a great deal from state to state. Nevertheless, in order to avoid an inequity in fees, in most states a corporation with limited assets and limited business capacity is not charged the same kind of fees charged to business giants such as Coca Cola or IBM.
How about Delaware or Wyoming?
Unfortunately, none of the other states, including Delaware and Wyoming, completely meet our requirements and cannot be recommended. Delaware and Wyoming used to be popular incorporation states for foreigners because Delaware and Wyoming were among the first states to allow a single person to wear the hats of Director, President, Vice President and Secretary and to allow the share holders to remain anonymous. However, the states recommended by us, now also offer the same benefits and more, so that there is no longer a particular advantage to incorporate in Delaware or Wyoming -especially in view of the fact, that most international tax authorities consider Delaware and Wyoming havens for tax cheats. Therefore, we only use Delaware or Wyoming in order to register yachts or aircraft or in instances where a desired name may not be available in another state. Nevertheless, if you wish, our attorneys can certainly form a corporation for you in any of the 50 states of the U.S., as long as you understand the potential disadvantages.
Why not an off-shore corporation?
Owning or doing business with a corporation in tax-evasion refuges like Panama, Liechtenstein, Luxembourg, the Channel Islands, Jersey, the Bahamas, the British West-Indies etc. is guaranteed to draw undesirable curiosity from the tax authorities in your own country. Furthermore, all of these countries have secret tax and extradition agreements with the USA and the EU countries. At the present time, only Dominica is to be recommended, since this country has no tax or extradition agreement with the USA or the EU countries, and under its Business Corporations Act of 1988, foreign owned corporations do not have to pay income tax or value-added tax and are even permitted to issue bearer shares. Unfortunately, Dominica’s tax-free status is well known to tax authorities all over the world. There is only one constellation (not legal for Americans) where a Dominican corporation might be useful.
In the U.S., just as in Europe and other parts of the world, a business can be structured to limit the liability of its owners and operators. There are Limited Partnerships, LLCs – Limited Liability Companies (the widespread story that an LLC is tax-free for foreigners or for income earned abroad, is a fairy tale) and there are Corporations. Of these business entities the Corporation offers the greatest protection and the most benefits for Europeans and other foreigners. Therefore, our information handbook only deals with the various aspects of the U.S. corporation.
As an owner or director of a U.S. corporation, you cannot be held personally liable for its business obligations and activities (We surely need not point out how such protection from liability can be a lifesaver under certain economic circumstances.) Although the liability protection of a European corporation is very similar, setting up a European corporation is quite expensive and requires a substantial amount of paid-in capital. Since the shareholders and directors of a U.S. corporation enjoy much higher liability protection than in a European corporation, a U.S. corporation is to be recommended even for businessmen who have no intention of being active in international business.
This should not be regarded as a call for tax evasion or other criminal activities. But there are many other good reasons for which one may wish to remain anonymous. In the states recommended by us, the owner (i.e. the shareholder) of a corporation does not need to be registered. Only the founder (i.e. we) and the directors and officers are registered with the state. You yourself can remain completely anonymous by appointing others to be directors and officers.
Inheritance taxes can be avoided by distributing your stock to your heirs during your lifetime (however, in order to avoid the problems described in “Can your corporation be taken over by the other shareholders?” you might consider the issuance of ‘preferred stock.’) Since a corporation is not dissolved in the case of the death of the owner, it can continue to be operated without interruption. Also, your heirs would have access to the corporate bank safe-deposit box, which in case of your death would not be locked and could not be accessed by creditors or officials. At present, inheritance taxes in the US start with estates in excess of $675,000. This will be raised to $1 million by 2004. However, the Bush administration is planning to eliminate it altogether.
Anyone who at any time has had a business failure, knows well how difficult it is to get on one’s feet again because of the negative information provided by credit bureaus. With a U.S. corporation, one can start afresh with a new name and still remain anonymous. The corporation can also bear the name of a person, such as Sir Lancelot, Inc., and have a bank account and a U.S. tax number in this name. (If you are interested in having your name changed officially by an American court, our attorneys can be of assistance.) We can also provide you with a Visa card in your new name and the name of your corporation.
In the states recommended by us, our attorneys are in a position to formulate the articles of incorporation in such a way that the business activities are not restricted to any particular purpose, but that the corporation may engage in any business or activity not forbidden by law. Thus, the corporation does not need to be re-organized in case it wishes to engage in a different business enterprise.
It is not generally known that since the federal tax reform of 1986 (and in spite of President Clinton), the U.S. has virtually become a corporate tax haven. Consider this: The federal income tax is only 15% on corporate net-profits of up to $50,000. The tax then increases in small increments, but stops at 36% (and only if you make over $10 million per year in net profits). Nevertheless, it should be noted that this tax structure applies only to the federal income tax, and that many U.S. states have individual tax structures that can be most unfavorable for the conduct of corporate business. However, most of the states recommended by us have no corporate income, sales, value-added or inventory taxes. When you consider that a corporation in Germany, for example, must pay an income tax of over 50% plus a hefty franchise tax, then our tax rates should sound pretty attractive. For instance, if a German corporation has a net profit of DM 100,000, then the German tax officials kindly permit it to keep nearly DM 30,000. If you were to pay taxes on the same DM 100,000 through your U.S. corporation, the corporation could keep over DM 80,000 in its own pocket.
How can a European save on taxes with a U.S. corporation?
Since we cannot condone illegal activities, our recommendations should not serve the illegal evasion of taxes but rather the legal avoidance of taxes. For this, it is necessary that the U.S. corporation be a legally established company, properly registered with the state of domicile with a U.S. tax number, U.S. telephone number, U.S. street address (not P.O. Box), U.S. bank account and a U.S. board of directors. If these conditions exist, there are many interesting possibilities for tax sheltering.
If the U.S. Corporation were to own all or parts of your overseas business, the appropriate profits could be channeled through a U.S. bank and would be subject only to the lesser U.S. tax. To allow funds to flow back into your own pockets, you could pay yourself a salary or borrow money from the U.S. corporation and -since you’re certainly well acquainted with the owner- pay it back at highly favorable rates and terms.
If you already own, or wish to purchase, property like aircraft, yachts, machinery, real estate, etc., but do not wish to pay large sales or VAT taxes, or wish to remain anonymous, the corporation can serve as the purchaser and owner of these objects. If any of these items need to be registered -such as aircraft or yachts- we could register them under an additional address in a state without sales or use taxes.
If you buy and sell real estate, there is the possibility of avoiding the capital gains tax (tax on profits in the sale of real estate) and property transfer tax. For this, one sets up a U.S. holding company, i.e. a parent company, and a separate subsidiary corporation for each piece of property. The property one buys is registered in the name of the subsidiary corporation. (This is possible in Europe, even in Germany where the tax authorities, after collecting the property transfer tax, have to issue a clearance certificate (cf. BHF, decision of June 12, 1995 = RIW 1996, pp. 88.) allowing the property to be registered in the name of the corporation.) Later, when a buyer is found for the property, nothing happens in the registry at the time of the resale, since not the property, but the corporation is sold. Thus, the transaction is not subject to transfer or capital gains taxes.
Assuming that your country allows the depreciation of certain business property (machinery, cars, buildings, etc.), that property can be sold to your U.S. corporation at the depreciated price. Your U.S. corporation may then lease the objects back to you at a substantially higher price. Naturally, the corporate profits are subject to U.S. federal income tax (albeit modest), but it is also possible to depreciate these items again, while you deduct your full lease payment from your own taxes overseas.
Another possibility for shifting the tax liability to your U.S. Corporation exists by using the U.S. corporation as a supplier of your merchandise. Here you would have the corporation buy the merchandise from your regular suppliers and then sell it to your company or store at such high prices that you would make little or no profit in your domestic company and thereby avoid a good portion of the taxes in your own country. Naturally, your U.S. corporation will have to pay taxes on the profits it makes, but it will be at the much lower U.S. tax rate.
Please take note that none of the above will work, if the U.S. corporation was not set up properly for your purposes. It is not enough to simply order a corporate shell from one of the many off-shore or Delaware incorporation mills. These folks have little or no knowledge of U.S. or European law. For instance, it is not widely known that under EU law, a company is taxed at the locale where the critical business decisions are reached, regardless of where the company is registered. Since the bylaws of a regular U.S. corporation do not ordinarily reflect a mandatory geographical limitation as to where the business decisions have to be made, our competitors’ customers have to pay European taxes sooner or later. This does not happen to our clients, since the corporate documents prepared by our attorneys specifically state that the critical decisions for the activities of the corporation have to be reached within the geographical confines of the U.S. This naturally presupposes that the corporation has its company address and telephone in the U.S. If not, there might be unpleasant consequences. For example, for the German owner of a Delaware corporation, the Düsseldorf Appellate Court recently refused to recognize the corporate protection (analogous to paragraph 11, sec. 3, GmbHG, and sec.1, clause 2, AktG) and held him personally liable for activities of the corporation, because his corporation had no telephone number or address in a U.S. telephone book (OLG Düsseldorf, decision of December 15, 1994, — 6U 59/94). Such difficulties can be avoided through our telephone/fax service. As you can see, there are endless possibilities of how one may benefit tax wise from the ownership of a U.S. corporation, as long as it is set up properly. In case one also wants to avoid U.S. taxation, there is even a possibility for this by using an Antigua holding corporation (more about this interesting alternative on our brochure). Nevertheless, for any in-depth tax advice for your own particular situation, it is important that you consult with a tax attorney in your country as well as in the U.S.
If you want protection against threatening creditors, tax officials, or an angry spouse, the corporation can be the owner of your valuable objects, such as boats, airplanes, real estate, or bank accounts. All title documents can be kept in the corporation’s bank safe-deposit box. In order to use these objects, you can lease them from the corporation under favorable conditions. In precisely the same way, your corporation can also appear as the owner of your domestic company, permitting you to remain anonymous as the real owner. Another advantage is that in the USA, a U.S. corporation is free of the withholding tax that is normally collected from foreigners in sales of real estate.
- Capitalization through selling shares
A U.S. corporation can pledge its shares, which represent a mathematically precise proportion of the company, as security for loans or sell them as investment objects. (In comparison with this, a limited liability Company such as a GmbH cannot issue shares and is difficult to capitalize.) A U.S. corporation can sell its shares to investors throughout the world, although for sales within the USA there are certain restrictions imposed by the Securities & Exchange Commission (SEC) and state agencies.
- Capitalization through bank loans
Not counting branch offices, there are a total of 24,437 U.S. banks with capital in excess of 50 trillion dollars. (There are less than half as many banks in all the rest of the world.) With such competition between money lenders, it is understandable that the credit climate in the USA is significantly more favorable than anywhere else in the world.
- Capitalization through venture capital
Venture capitalists control billions of dollars of investment capital. Since a venture capitalist participates in the profits of the capitalized venture, he is naturally much more risk-friendly than U.S. banks which are forbidden to participate in the financial success of an enterprise. Thus, if a corporation cannot offer sufficient security for a bank loan or afford the expense of going public, a connection with a venture-capital company is the most promising path to capitalization.
UNITED STATES INTERNATIONAL TAX SITE: STATES’ TAX REGIMES
Double taxation agreement Switzerland – USA
See Article 22 and additions to Article 22 in the protocol and memorandum of understanding
Double taxation agreements in other countries
See Article 28 and additions to Art. 28 in the protocol and memorandum of understanding
See Article 16 and additions to Art. 16 in the memorandum of understanding
See Article 30
See Article 26, memorandum of understanding and Notes Exchange (protocol)
State income tax is levied in addition to federal income tax, except in certain cases noted below in which all or part of federal income tax paid is allowed to be set off against state income tax. See Forms of Company for details of structures (LLCs, ‘S’ Corporations etc) that allow a ‘pass-through’ tax situation, in which federal income tax (and therefore, state income taxes) apply to the owners of the organization rather than to the organization itself. For most incorporated commercial organizations (known as ‘C’ corporations) and foreign companies, federal income taxes will apply to income earned from business activity in the US, and state income taxes will apply in all of the states where a business has qualifying activity.
Business activity in a state will attract taxation there if the organization concerned has ‘nexus’ in that state. Nexus for income tax purposes is normally established when a corporation derives income from sources within the state, owns or leases property there, employs personnel there or has capital or property in the state. However, the exact definition varies from state to state.
Congress has however established some exemptions from state taxation. Law 86-272 provides immunity from state taxation if a business merely solicits orders for the sales of tangible personal property that are sent outside the state for approval or rejection and, if approved, are filled and shipped by the business from a point outside the state. The law does not cover leases, rentals, transfers of real property and the sale of services. The statute does not define solicitation; therefore, each state defines it differently.
Nexus is usually not created by the following activities:
- Advertising campaigns or sales activities and incidental and minor advertising;
- Carrying free samples only for display or distribution;
- Owning or furnishing automobiles to salespersons;
- Passing inquires or complaints to the home office;
- Maintaining a sample or display room for less than 14 days; or
- Soliciting sales by an in-state resident employee, provided that the employee does not maintain a place of business in the state, including an office in the home.
The sitaution regarding intellectual property is confused. In some states the licensing of a trademark is sufficient to establish nexus; in others, not.
Some states attempt (often unsuccessfully) to ‘attribute’ nexus to an entity based on the activities of related (eg subsidiary or affiliated) entities. Nexus is attributed using the concept of agency, the ‘alter ego’ theory, or the concept of unitary taxation (most famously in California against multinationals, where it failed).
State taxation is relatively simply if a company is doing business in just one state, but if a business operates in multiple states, income will have to be apportioned according to sometimes complex formulae, and there is plentiful room for dispute. The Uniform Division of Income for Tax Purposes Act (UDITPA) was established to provide uniformity among the states with respect to the taxation of multistate corporations, and it has been adopted, at least in part, by most states. UDITPA provides that a business is considered to be taxable in another state when:
- The corporation is subject to the other state’s net income tax, franchise tax measured by net income, franchise tax for the privilege of doing business, or corporate stock tax; or
- The other state has jurisdiction to impose a net income tax on the corporation, whether or not the state actually does so.
Most of the states that impose a corporate income tax begin the computation of state taxable income with taxable income as reflected on the federal corporate income tax return (Form 1120). Those states use either taxable income before the net operating loss and special deductions (Line 28) or taxable income itself (Line 30). Those states whose computation of state taxable income is not coupled to the federal tax return could adopt their own state-specified definitions of gross and taxable income. Nevertheless, even those states typically adopt the majority of federal income and deduction provisions.
For 2004, the standard federal income tax rate for corporations in the US is 35% for income above $18.33 million. Lower rates apply for small company profits. Personal service corporations pay 35% regardless of income level. Personal holding companies pay an additional tax on undistributed income, of 15%. This tax can also apply to regular corporations in some circumstances.
Following the table of income rates in all states, given below, two individual states (Delaware and Nevada) with particularly favourable corporate regimes (not necessarily just tax) are reviewed in more detail.
In May, 2004, a poll conducted by Bloomberg’s Wealth Management magazine, found that the state of New York ranked 49th in a league table measuring the tax burden in each state, with only Wisconsin and “tax hell” Rhode Island producing worse results.
By using an identical set of six tax parameters, the survey found that the most wealth-friendly state was Wyoming, where these parameters produced a tax bill of $7,259. By comparison, the same tax calculations resulted in a bill of $56,419 in Rhode Island.
US State Income Tax For Corporations
US State Income Tax For Corporations – 2004
|State||Income Tax (Range) %||Brackets ($)||Comments||Federal Tax Deductible?|
|Alaska||1.0 – 9.4||10,000 – 90,000||No|
|Arkansas||1.0 – 6.5||3,000 – 100,000||No|
|California||8.84||flat rate||1.5% for S Corporations||No|
|Hawaii||4.4 – 6.4||25,000 – 100,000||No|
|Iowa||6.0 – 12.0||25,000 – 250,000||Yes (50%)|
|Kansas||4.0||flat rate||Plus 3.5% over 50,000||No|
|Kentucky||4.0 – 8.25||25,000 – 250,000||No|
|Louisiana||4.0 – 8.0||25,000 – 200,000||Yes|
|Maine||3.5 – 8.93||25,000 – 250,000||No|
|Michigan||1.9||flat rate||wide tax-base||No|
|Mississippi||3.0 – 5.0||5,000 – 10,000||No|
|Nebraska||5.58 – 7.81||50,000||No|
|New Hampshire||8.5||flat rate||No|
|New Jersey||9.0||flat rate||No|
|New Mexico||4.8 – 7.6||500,000 – 1m||No|
|New York||7.5||flat rate||No|
|North Carolina||6.9||flat rate||No|
|North Dakota||3.0 – 10.5||3,000 – 50,000||Yes|
|Ohio||5.1 – 8.5||50,000||No|
|Rhode Island||9.0||flat rate||No|
|South Carolina||5.0||flat rate||No|
|South Dakota||6.0||flat rate||No|
|Texas||4.5||flat rate||on ‘earned surplus’||No|
|Vermont||7.0 – 9.75||10,000 – 250,000||No|
|West Virginia||9.0||flat rate||No|
|Washington DC||9.975||flat rate||No|
More than half of the Fortune 500 are incorporated in Delaware. This is partly because Delaware has very business-minded legislation, and partly because Delaware corporate income tax applies only to business conducted in Delaware itself. If a corporation does not conduct business in Delaware, the only tax paid to Delaware is an annual ‘franchise’ tax which for most companies is between US$50 and US$100. The minimum annual franchise tax for a corporation with up to 3,000 shares of no par or $.01 par common stock is $30, plus a filing fee of $20.
The Delaware courts frequently handle significant cases on an expedited basis when time is critical to the litigants. Delaware’s recently enacted Summary Proceedings Act offers a unique procedure to resolve major commercial disputes on an expedited schedule with special rules to minimize the burden and expense of litigation.
Corporate offices may be located anywhere in the world, as long as the corporation maintains a registered agent in Delaware, and a Delaware corporation, limited liability company, or business entity can be formed without a visit to the state. Delaware corporations have no minimum capital requirement.
In Delaware, a special type of corporation, known as the “professional corporation,” exists for licensed professionals, such as doctors, architects, accountants, and attorneys, who by law or ethical rules may not practice in the form of a regular corporation. The salient features of the professional corporation are that only licensed professionals may be stockholders, each stockholder participates as a director in the management of the business, and each stockholder remains personally liable for his or her own professional negligence or malpractice and that of any other stockholder, employee or agent working under the stockholder’s supervision and control.
For non-tax purposes, a Delaware general partnership is a separate entity from its partners, may conduct business, acquire, hold, and dispose of property, and sue and be sued in its name, without the need to join all partners as parties. Delaware authorizes a special form of general partnership known as a limited liability partnership. In a limited liability partnership, the partnership is required to register with the Delaware Secretary of State and maintain a specified amount of liability insurance. In return, partners are relieved of personal liability for obligations of the partnership. Partners remain personally liable for their own negligence or misconduct and that of persons under their direct supervision and control. The limited liability partnership is attractive to professionals who want the benefits of the partnership form but without the personal liability for the professional misconduct of other partners and employees.
Historically, the price for limited liability was that limited partners could have no participation in management of the partnership, which was vested entirely in the general partner. Delaware’s current limited partnership laws provide great flexibility in this area, however, and it is possible to structure a limited partnership agreement that gives considerable management participation to limited partners without jeopardizing their limited liability.
Without loss of limited liability, limited partners may:
- Transact business with the limited partnership;
- Be a control person of a general partner;
- Consult with and advise the general partner;
- Serve on a committee of limited partners;
- Vote on matters such as dissolution, a sale of assets, a merger, and admission or removal of a general partner.
Limited Liability Company
Formed by filing a certificate of formation with the Delaware Secretary of State, a limited liability company is a separate legal entity having the power to conduct business, acquire, hold and dispose of property, and sue or be sued in its own name. A limited liability company needs to have only one member. Management may be by the members or by selected managers who may or may not be members themselves. As with limited partnerships, the relationships among members and the management structure are typically set forth in a written limited liability company agreement. A limited liability company agreement may provide for various classes of members and managers and their respective rights, powers and duties and it may also set forth the manner of allocation of profits and losses of a limited liability company to its members.
Principal attributes of a limited liability company include:
- any member or manager may bind a limited liability company;
- except in certain limited situations, no member or manager is personally liable for the debts or obligations of a limited liability company;
- perpetual existence.
Delaware Business Trust
A Delaware business trust, another extremely flexible business structure, is an unincorporated association created by a trust instrument and the filing with the Secretary of State of Delaware of a certificate of trust. A governing instrument, which includes the trust instrument, provides for the governance of the business trust and the conduct of its business. A governing instrument may provide for various classes of trustees and beneficial owners and define their respective rights, powers, and duties. A business trust has perpetual existence. It is managed by one or more named trustees who are not liable for the obligations of the business trust. The beneficial owners have the same insulation from liability as shareholders of a corporation, have an undivided beneficial interest in the business trust’s property, and have no interest in specific business trust property. However, the governing instrument may alter any of these attributes. In most cases, at least one trustee must be either a Delaware resident or have a principal place of business in Delaware.
Delaware Investment Holding Company
A Delaware Investment Holding Company is a corporation that has been established in Delaware with the sole purpose to manage and maintain its intangible assets. These corporations, whose activities within Delaware are restricted to the realization of income from intangible investments, are exempt from Delaware taxation. Intangible investments include: stocks, bonds, notes and other debt obligations, patents, patent applications, trademarks, and other intellectual property.
As in all states, Nevada LLCs, ‘S’ Corporations and Trusts have the tax advantages established by federal law and described on our Forms of Company page.
There are however some additional advantages of Nevada incorporation, including:
- Tight protection against ‘piercing of the corporate veil’. In order to attack the foreign (ie out-of-state) owner of a Nevada corporation, a claimant must prove that the corporation is influenced and governed by the person asserted to be the ‘alter ego’, and that there is such unity of interest and ownership that one is inseparable from the other, and that adherence to the corporate fiction of a separate entity would, under the circumstances, sanction fraud or promote injustice. In 23 years, the courts have only once backed a claimant, and that was in a case of outright fraud committed in Nevada itself.
- Corporate officers and directors can be indemnified. Under a 1987 law, corporations are allowed to place provisions in their articles of incorporation that eliminate the personal liability of officers and directors to the stockholders of Nevada corporations. Although Delaware and some other states soon adopted similar laws, Nevada’s law remains as strong as any. In addition, the Nevada Corporation Code allows for the indemnification of all officers, directors, employees, stockholders, or agents of a corporation for all actions that they take on behalf of the corporation that they had reasonable cause to believe was legal.
- Joint and several liability has been abolished in Nevada in damage litigation. Nevada now requires the court to assign a percentage of fault to each defendant, from zero to one hundred with the total equal to 100 percent. Every defendant found liable is required to pay a share of the total judgment no greater than his/her fault.
- Nevada’s corporate law is particularly favourable to rights of small corporations. For instance, under Nevada law officers and directors are protected in cases of acts or omissions committed in good faith, officers are exempt from monetary damages, directors cannot be attacked for breach of a director’s duty of loyalty, and both officers and directors are permitted to undertake transactions involving undisclosed personal benefit to the officer or director. Delaware law is considerably less favourable.
Given the combination of legal benefits offered under Nevada law, large numbers of large and small US and foreign corporations choose Nevada incorporation even if their business activities are going to take place in other states. Citibank is an example.