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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 |
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.
|
