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U.S. Corporation: Company formation in the USA

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U.S. Corporation: Company formation in the USA

offshore company formation

In the U.S., just as in Europe and other parts of the world, a business can be structured to limit the liability of its owners and operators. There are Limited Partnerships, LLCs - Limited Liability Companies (the widespread story that an LLC is tax-free for foreigners or for income earned abroad, is a fairy tale) and there are Corporations. Of these business entities the Corporation offers the greatest protection and the most benefits for Europeans and other foreigners. Therefore, our information handbook only deals with the various aspects of the U.S. corporation.
 

As an owner or director of a U.S. corporation, you cannot be held personally liable for its business obligations and activities (We surely need not point out how such protection from liability can be a lifesaver under certain economic circumstances.) Although the liability protection of a European corporation is very similar, setting up a European corporation is quite expensive and requires a substantial amount of paid-in capital. Since the shareholders and directors of a U.S. corporation enjoy much higher liability protection than in a European corporation, a U.S. corporation is to be recommended even for businessmen who have no intention of being active in international business.
 

This should not be regarded as a call for tax evasion or other criminal activities. But there are many other good reasons for which one may wish to remain anonymous. In the states recommended by us, the owner (i.e. the shareholder) of a corporation does not need to be registered. Only the founder (i.e. we) and the directors and officers are registered with the state. You yourself can remain completely anonymous by appointing others to be directors and officers.
 

Inheritance taxes can be avoided by distributing your stock to your heirs during your lifetime (however, in order to avoid the problems described in "Can your corporation be taken over by the other shareholders?" you might consider the issuance of ‘preferred stock.’) Since a corporation is not dissolved in the case of the death of the owner, it can continue to be operated without interruption. Also, your heirs would have access to the corporate bank safe-deposit box, which in case of your death would not be locked and could not be accessed by creditors or officials. At present, inheritance taxes in the US start with estates in excess of $675,000. This will be raised to $1 million by 2004.  However, the Bush administration is planning to eliminate it altogether.
 

Anyone who at any time has had a business failure, knows well how difficult it is to get on one’s feet again because of the negative information provided by credit bureaus. With a U.S. corporation, one can start afresh with a new name and still remain anonymous. The corporation can also bear the name of a person, such as Sir Lancelot, Inc., and have a bank account and a U.S. tax number in this name. (If you are interested in having your name changed officially by an American court, our attorneys can be of assistance.) We can also provide you with a Visa card in your new name and the name of your corporation.
 

In the states recommended by us, our attorneys are in a position to formulate the articles of incorporation in such a way that the business activities are not restricted to any particular purpose, but that the corporation may engage in any business or activity not forbidden by law. Thus, the corporation does not need to be re-organized in case it wishes to engage in a different business enterprise.
 

It is not generally known that since the federal tax reform of 1986 (and in spite of President Clinton), the U.S. has virtually become a corporate tax haven. Consider this: The federal income tax is only 15% on corporate net-profits of up to $50,000. The tax then increases in small increments, but stops at 36% (and only if you make over $10 million per year in net profits). Nevertheless, it should be noted that this tax structure applies only to the federal income tax, and that many U.S. states have individual tax structures that can be most unfavorable for the conduct of corporate business. However, most of the states recommended by us have no corporate income, sales, value-added or inventory taxes. When you consider that a corporation in Germany, for example, must pay an income tax of over 50% plus a hefty franchise tax, then our tax rates should sound pretty attractive. For instance, if a German corporation has a net profit of DM 100,000, then the German tax officials kindly permit it to keep nearly DM 30,000. If you were to pay taxes on the same DM 100,000 through your U.S. corporation, the corporation could keep over DM 80,000 in its own pocket.

How can a European save on taxes with a U.S. corporation?

Since we cannot condone illegal activities, our recommendations should not serve the illegal evasion of taxes but rather the legal avoidance of taxes. For this, it is necessary that the U.S. corporation be a legally established company, properly registered with the state of domicile with a U.S. tax number, U.S. telephone number, U.S. street address (not P.O. Box), U.S. bank account and a U.S. board of directors. If these conditions exist, there are many interesting possibilities for tax sheltering.

If the U.S. Corporation were to own all or parts of your overseas business, the appropriate profits could be channeled through a U.S. bank and would be subject only to the lesser U.S. tax. To allow funds to flow back into your own pockets, you could pay yourself a salary or borrow money from the U.S. corporation and -since you’re certainly well acquainted with the owner- pay it back at highly favorable rates and terms.

If you already own, or wish to purchase, property like aircraft, yachts, machinery, real estate, etc., but do not wish to pay large sales or VAT taxes, or wish to remain anonymous, the corporation can serve as the purchaser and owner of these objects. If any of these items need to be registered -such as aircraft or yachts- we could register them under an additional address in a state without sales or use taxes.

If you buy and sell real estate, there is the possibility of avoiding the capital gains tax (tax on profits in the sale of real estate) and property transfer tax. For this, one sets up a U.S. holding company, i.e. a parent company, and a separate subsidiary corporation for each piece of property. The property one buys is registered in the name of the subsidiary corporation. (This is possible in Europe, even in Germany where the tax authorities, after collecting the property transfer tax, have to issue a clearance certificate (cf. BHF, decision of June 12, 1995 = RIW 1996, pp. 88.) allowing the property to be registered in the name of the corporation.) Later, when a buyer is found for the property, nothing happens in the registry at the time of the resale, since not the property, but the corporation is sold. Thus, the transaction is not subject to transfer or capital gains taxes.

Assuming that your country allows the depreciation of certain business property (machinery, cars, buildings, etc.), that property can be sold to your U.S. corporation at the depreciated price. Your U.S. corporation may then lease the objects back to you at a substantially higher price. Naturally, the corporate profits are subject to U.S. federal income tax (albeit modest), but it is also possible to depreciate these items again, while you deduct your full lease payment from your own taxes overseas.

Another possibility for shifting the tax liability to your U.S. Corporation exists by using the U.S. corporation as a supplier of your merchandise. Here you would have the corporation buy the merchandise from your regular suppliers and then sell it to your company or store at such high prices that you would make little or no profit in your domestic company and thereby avoid a good portion of the taxes in your own country. Naturally, your U.S. corporation will have to pay taxes on the profits it makes, but it will be at the much lower U.S. tax rate.

Please take note that none of the above will work, if the U.S. corporation was not set up properly for your purposes. It is not enough to simply order a corporate shell from one of the many off-shore or Delaware incorporation mills. These folks have little or no knowledge of U.S. or European law. For instance, it is not widely known that under EU law, a company is taxed at the locale where the critical business decisions are reached, regardless of where the company is registered. Since the bylaws of a regular U.S. corporation do not ordinarily reflect a mandatory geographical limitation as to where the business decisions have to be made, our competitors’ customers have to pay European taxes sooner or later. This does not happen to our clients, since the corporate documents prepared by our attorneys specifically state that the critical decisions for the activities of the corporation have to be reached within the geographical confines of the U.S. This naturally presupposes that the corporation has its company address and telephone in the U.S. If not, there might be unpleasant consequences. For example, for the German owner of a Delaware corporation, the Düsseldorf Appellate Court recently refused to recognize the corporate protection (analogous to paragraph 11, sec. 3, GmbHG, and sec.1, clause 2, AktG) and held him personally liable for activities of the corporation, because his corporation had no telephone number or address in a U.S. telephone book (OLG Düsseldorf, decision of December 15, 1994, — 6U 59/94). Such difficulties can be avoided through our telephone/fax service. As you can see, there are endless possibilities of how one may benefit tax wise from the ownership of a U.S. corporation, as long as it is set up properly. In case one also wants to avoid U.S. taxation, there is even a possibility for this by using an Antigua holding corporation (more about this interesting alternative on our brochure). Nevertheless, for any in-depth tax advice for your own particular situation, it is important that you consult with a tax attorney in your country as well as in the U.S.
 

If you want protection against threatening creditors, tax officials, or an angry spouse, the corporation can be the owner of your valuable objects, such as boats, airplanes, real estate, or bank accounts. All title documents can be kept in the corporation’s bank safe-deposit box. In order to use these objects, you can lease them from the corporation under favorable conditions. In precisely the same way, your corporation can also appear as the owner of your domestic company, permitting you to remain anonymous as the real owner. Another advantage is that in the USA, a U.S. corporation is free of the withholding tax that is normally collected from foreigners in sales of real estate.
 

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.

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 - 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.

 

 

 

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