Getting incorporated in Delaware: 3 Case studies

ICO Services
Jul 25, 2017 · 5 min read

The United States’ IRS is very active in chasing U.S. citizens’ assets and forcing them to reveal their offshore holdings (or else.) So far, the IRS — along with DoJ’s help to pressure offshore jurisdictions from the legal side of the action — is successful in their endeavor: Switzerland succumbed to the U.S.’ demand, which practically forced the most popular offshore jurisdiction in the world to end the age-old banking secrecy.

Of course, in reality, Switzerland is still thriving as a go-to jurisdiction for stashing wealth offshore. However, legally-speaking, asset holders now have limited wiggle room than ever due to the policies that are pro-transparency (e.g., AEoI/CRS, FATCA, etc.) But we’re not talking about this today (perhaps in an upcoming article?) Instead, we’ll talk about the almighty United States, who positions itself as one of the most aggressive jurisdictions in pursuing their citizens’ wealth offshore.

However, surprisingly, the U.S. is also known for something that’s completely the opposite: Not many realize that the U.S. is “secretly” known as a large and strong offshore jurisdiction.

That’s right, the United States — with all the policies that serve as ‘tools’ to shed light over U.S. citizens’ hidden wealth and tax (and penalize) them accordingly to exert some forms of control over their asset flows — are known as one-sided when it comes to taxpayers’ information sharing. Here’s why: The U.S. doesn’t reciprocate.

While the U.S. demands other jurisdictions to share U.S. citizens tax information, they don’t share other jurisdictions’ taxpayer information in return. This simply means one thing: If you are a non-U.S. citizen, you’d better hold your assets in the U.S. instead of other offshore jurisdictions. In fact, offshore jurisdictions like the Cayman Islands is proven to be less permissive compared to the U.S.

The offshore U.S.: Where?

There are U.S. states that offer businesses certain benefits (usually related to taxes) legally. And rightly so, those states are becoming the home of some of the biggest companies in the world.

Perhaps the most popular U.S. offshore jurisdiction is the State of Delaware.

Delaware, despite ranked 45th in total population in the U.S. (close to 1 million,) ranked 9th when it comes to the number of millionaires per capita (source.) Perhaps that’s related to the fact that over 50 percent of U.S. publicly traded companies and 63 percent of Fortune 500 companies are incorporated in Delaware.

One single biggest benefit of getting incorporated in Delaware is the favorable law toward business operations and taxation. You basically pay zero taxes for business activities outside Delaware. Not only that, the incorporation process is simple and quick. In just three working days, you can legally establish a company in Delaware…

…which lead us to the main topic of this article: While it’s easy to get incorporated in Delaware, how do companies actually do it, and for what purposes do they do it?

To answer your question, an effective way is by sharing case studies of how companies — big and small — establish their headquarters in Delaware, and why they choose the offshore route.

Delaware incorporation: Case studies

Without further adieu, here are three case studies to show-and-tell you:

Case Study 1: A blog business

Business blog ABC is run by Mr. A (both are not real names, hidden for privacy reasons.) The blog is making six-digit figure annually and is considered as a success in its niche. Due to the figure, Mr. A thought that it’s a good time to incorporate the blog to enjoy legal protection benefits. Unfortunately, this would also require financial reporting and, of course, pay corporate taxes.

Mr. A is based in India. But he considered going offshore for his blog’s incorporation. He chose Delaware, United States. The reason? No taxes for business operations outside the U.S. and the company image embedded for having his business headquartered in the U.S.

Case Study 2: A SaaS startup

SaaS startup ABC is co-founded by Mr. X and Ms. Y. They decided to setup their startup HQ in Delaware for VC funding purposes.

Indeed, VCs prefer Delaware C-corporations when making investments — which is probably the main reason why many tech startups are planning to get a VC funding to form a Delaware C-corporation. But why do Venture Capital firms prefer to fund Delaware-based tech startups over other states? According to Tej Prakash, Co-founder of Should I Sign, there are two reasons for such preference:

1. Predictability in jurisprudence: Delaware has a well-established jurisprudence, which allows corporations to structure transactions that will reduce the possibility for them to be challenged in court, as well as obtaining a favorable ruling. Moreover, due to Delaware’s flexibility, the process for a VC to ask for a board seat for decision-making influencing roles (in exchange for the fund invested) is made simple.

2. Easy to facilitate outside investments: Delaware corporations are allowed to create various classes of shares, which favor VCs that’ll likely to ask for preferred stock, which allow them to vote or liquidate at their own discretion. Making changes regarding ownership is simple for a Delaware C-corporation (amendments can be filed and received on the same day.)

Case Study 3: A music company (a legally-structured music band)

ABC is the name of a successful group of musicians. They (or their lawyers) decided to incorporate as ABC. Other than profits from merchandise sales, concert fees, etc., they receive royalty fees whenever their songs’ licenses are used. As local taxes on such income is considerably high, they decided to setup a company in Delaware and moved their intellectual property to the state.

The main purpose of the shift is no other than avoiding taxes — which is legal, by the way. But why Delaware? It makes sense, really: Delaware doesn’t apply taxes on intangible assets, which include trademarks, copyrights, and royalties. The savings are quite significant, to say the least.

Conclusion

There are more case studies we could include in this article, but most of them are geared toward the same focus: Companies are formally setup in Delaware to benefit from its business-pro laws and policies, most typically related to tax avoidance, intellectual property protection and VC funding. Add to those the fact that the U.S. has done a great job in protecting the information of companies and their stakeholders within its own jurisdiction, Delaware — along with other states offering similar benefits to non-U.S. asset holders like Nevada, Delaware, Montana, South Dakota, Wyoming and New York.

To conclude, if you are a non-U.S. citizen, you should consider getting incorporated in Delaware, United States. The state has beneficial policies for asset holders, and the U.S. itself is one of the largest and strongest offshore jurisdictions in the world with excellent protection over financial information held within the jurisdiction.

If you would like to learn more about Delaware incorporation, consult with us for free.

ICO Services

Written by

ICO SERVICES is specialized in the formation of Offshore Companies and Offshore Banking. https://www.icoservices.com (Author: Enzo de Vicentes)

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