Why businesses choose to incorporate in Delaware

01
Nov 2019
  • BY: italiancpafirms
  • TAG: business
  • 01 COMMENT

There are many reasons why more and more businesses are incorporating in Delaware, especially non-resident companies wishing to expand into the US.

Let’s see why.

The legal framework in Delaware is particularly suitable for corps, boards, and shareholders.

There’s a separate court system, the Court of Chancery, whose corporate laws influence Supreme Court decisions. A great benefit is represented by the fact that Courts are expert in dealing with business problems.

Delaware offers reduced bureaucracy to form new companies fairly quickly. In some cases, it’s also possible to convert an LLC to a C-corp with just one state and one IRS filing.

The tax system is extremely favorable. Business transactions are not taxed. No value-added tax and no personal tax is applied in Delaware. Sometimes a county-level real estate property tax applies but it’s lower than other states. Also, there is no inheritance tax.

Delaware also doesn’t have a corporate tax on interest or other investment income earned by holding companies.

Incorporating in Delaware can be particularly beneficial to:

  • Non-us citizens or residents wishing to expand to the US market
  • Companies with high mobility
  • Publicly traded companies
  • Companies about to go public

From a legal and fiscal point of view, Delaware makes incorporating and management easier but it might not be the best solution for small startups who are in the early stages of their business.

Even if they incorporate in Delaware, they are required to register as a foreign entity in their home state (where they do business) too. They would save time thanks to reduced bureaucracy, but they would spend it registering their company in their home state anyway.

In addition to that, they would be required to comply with corporate government laws in both states. Also, in their home state, they would be subject to tax liability. Another consideration to make is that they would need help to form their business in Delaware, and that means they would bear extra costs to pay a registered agent to do that. Especially in the early stages, resources can be limited, that’s why start-ups should think about it very carefully and might consider incorporating in Delaware when they become larger, or when they receive venture capital.

Italian investors who need to choose the right type of business, have to consider a few fundamental differences among the different types.

LLC – LIMITED LIABILITY COMPANY

This type of business usually requires less paperwork and procedures. LLC accounting is simpler than C-corp accounting. Members get protection from personal liability.

Avoid double taxation: LLC is not taxed as an entity, members show the earnings in their individual tax returns, paying taxes accordingly. LLC doesn’t allow for shareholders, so it’s not the best option if the company’s plans include having outside investors. There are some types of investors whose structure doesn’t permit to invest in an LLC. In this case, the C-Corp would be a better solution.

CORPORATION

Both C-corps and S-corps are separate legal entities and offer limited liability protection. Both have shareholders, directors, officers and follow the same corporate formalities and obligations (bylaws, shareholder meetings, annual reports, annual fees).

The main differences are that S-corps can have one class of stock and have restrictions on ownership: they cannot have more than 100 shareholders and cannot be owned by LLCs, C-corps, other S-corps, or partnerships. The shareholders must be US citizens/residents.

C-corps are separately taxable entities – they file a corporate tax return and pay taxes at the corporate level. Double taxation can apply if corporate income is distributed as dividends, considered personal income. S-corps are pass-through tax entities, so they file an informational federal return but do not pay taxes at the corporate level. The profits/losses of the business are reported on the owners’ personal tax returns.

So, to recap, the LLC is probably, the easiest way to start. And afterward, when the business grows, it can be beneficial to convert to a C-corp or S-corp, considering that C-corps provide more flexibility when plans are to expand the ownership or sell.

Anyway, there are many factors to take into account when deciding to incorporate in a foreign country. We recommend getting advice from professional consultants who can help clarify doubts and suggest the best solutions according to each one’s requirements.

Our studies are at your disposal for any further information you may need, get in touch.

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