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U.S. corporation:
Company
formation in the USA
Company
formation USA: U.S. Corporation
What is a U.S. corporation and what can it
do?
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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?
Can a U.S. corporation be active
in Europe and be registered with the authorities in European countries?
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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:
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Close Corporation
(limited number of shareholders)
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Open Corporation
(unlimited number
of shareholders)
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Public Corporation
(can sell shares
on the exchanges)
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Non-Profit corporation
(such as churches or schools)
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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:
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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.
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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.
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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?
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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?
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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:
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A proper name
such as Detroit, New York,
Nevada, Montana, Western, Southern, Eastern, Rocky Mountain,
Pacific, Atlantic, International, etc., etc.
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A name of an industry
such as Financial, Consulting,
Investment, Credit, Leasing, Engineering, Software, Development,
Mining, Construction, Interstate, etc., etc.
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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?
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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?
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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:
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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.
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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.
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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.
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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.
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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.
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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.
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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.
a) 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.
b) 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.
c) 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.
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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?
|
|
Alabama
|
6.5
|
flat rate
|
|
Yes
|
|
Alaska
|
1.0 - 9.4
|
10,000 - 90,000
|
|
No
|
|
Arizona
|
6.968
|
flat rate
|
|
No
|
|
Arkansas
|
1.0 - 6.5
|
3,000 - 100,000
|
|
No
|
|
California
|
8.84
|
flat rate
|
1.5% for S Corporations
|
No
|
|
Colorado
|
4.63
|
flat rate
|
|
No
|
|
Connecticut
|
7.5
|
flat rate
|
|
No
|
|
Delaware
|
8.7
|
flat rate
|
|
No
|
|
Florida
|
5.5
|
flat rate
|
|
No
|
|
Georgia
|
6.0
|
flat rate
|
|
No
|
|
Hawaii
|
4.4 - 6.4
|
25,000 - 100,000
|
|
No
|
|
Idaho
|
7.6
|
flat rate
|
|
No
|
|
Illinois
|
7.3
|
flat rate
|
|
No
|
|
Indiana
|
8.5
|
flat rate
|
|
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
|
|
Maryland
|
7.0
|
flat rate
|
|
No
|
|
Massachusetts
|
9.5
|
flat rate
|
|
No
|
|
Michigan
|
1.9
|
flat rate
|
wide tax-base
|
No
|
|
Minnesota
|
9.8
|
flat rate
|
|
No
|
|
Mississippi
|
3.0 - 5.0
|
5,000 - 10,000
|
|
No
|
|
Missouri
|
6.25
|
flat rate
|
|
Yes
|
|
Montana
|
6.75
|
flat rate
|
|
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
|
|
Nevada
|
zero
|
|
|
|
|
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
|
|
Oklahoma
|
6.0
|
flat rate
|
|
No
|
|
Oregon
|
6.6
|
flat rate
|
|
No
|
|
Pennsylvania
|
9.9
|
flat rate
|
|
No
|
|
Rhode Island
|
9.0
|
flat rate
|
|
No
|
|
South Carolina
|
5.0
|
flat rate
|
|
No
|
|
South Dakota
|
6.0
|
flat rate
|
|
No
|
|
Tennessee
|
6.5
|
flat rate
|
|
No
|
|
Texas
|
4.5
|
flat rate
|
on 'earned surplus'
|
No
|
|
Utah
|
5.0
|
flat rate
|
|
No
|
|
Vermont
|
7.0 - 9.75
|
10,000 - 250,000
|
|
No
|
|
Virginia
|
6.0
|
flat rate
|
|
No
|
|
West Virginia
|
9.0
|
flat rate
|
|
No
|
|
Wisconsin
|
7.9
|
flat rate
|
|
No
|
|
Washington
|
zero
|
|
|
|
|
Washington DC
|
9.975
|
flat rate
|
|
No
|
|
Wyoming
|
zero
|
|
|
|
 |
Delaware |
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.
|
|
Nevada |
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.
|
|
