Let's discuss the state of Delaware- the place where the US President, Joe Biden, hails from. By the way, this post is not about politics, but about registering companies in the "First State". We noticed that non-residents are frequently offered to start a company in Delaware, and more than half a million U.S. businesses and startups are registered in this state.
Before you decide to register in any jurisdiction you need to understand whether the benefits of a particular state are relevant for your business.
Most Tax Free Corp customers open companies in the United States to do business on the Amazon website. As a rule, it is the type of business that does not require corporate investment - it is sufficient to have an LLC-company and not a C-Corp for aspiring entrepreneurs.
In fact, Delaware's business climate is only favorable for corporations. If you have an LLC, then all the potential benefits that are described so well are not for you.
For example, if you are going to raise venture capital Delaware is a good choice, due to the fact that investors are familiar with its corporate law. If this was not the case and your company is an LLC – this advantage is not for you.
Let us take a closer look at those popular advantages that are often mentioned. Firstly, the Delaware Court of Chancery specializes in corporate law. There are precedents in past cases that can predict the outcome in a legal dispute. On the one hand this is very good, but on the other we should consider the fact that the judicial system of other states is not organized by simpletons. Besides, most entrepreneurs are located in the CIS countries and our clients will never face the US judicial system.
Secondly, the fact that company shares are not taxed by the State of Delaware if their owners do not reside in that state is again only relevant for corporations.
In fact, Federal taxes are the same for all companies in the United States. There are NO tax breaks in Delaware. Although there is no sales tax, there is a small alternative to this tax – the Gross Receipts Tax. There is also no tax on the property of individuals – well, that's why millionaires live there. However, the income tax rate is 8.7 %, which is higher than in most other states.
Some people believe that an application for registration is processed instantly, as a priority, in the state of Delaware. This is debatable; you may get an answer faster from Delaware than from California or Florida, but there are many other states where the answer comes instantly: Wyoming, Colorado, Minnesota, New Mexico, and more.
The Formation of company documents in Delaware does not include the names of the founders. So what? Wyoming, Colorado, New Mexico have a similar situation. New Mexico is generally the only state where the registration of an anonymous LLC is allowed.
We believe that Delaware is too overvalued for business. And LLC owners will not see the benefits of registering a company there.
To sum up, we suggest that all the benefits of Delaware are a bit overrated. LLC owners will not see the benefits of registering a company there.
Moreover, for the entrepreneurs from CIS countries with Russian surnames, becoming an owner of a company in Delaware invokes the risk of increased attention from banks and the IRS. Why is that? Fact: Russian businessmen at one time massively used Delaware companies for money laundering; one day, the Internal Revenue Service of the United States got interested in this issue and found that a huge number of American companies run fabulous amounts in dollars and withdraw to third-party bank accounts outside the United States. It's worth thinking about!
One more important thing is that there are disadvantages of this State even for corporations.
- For instance, the cost of creating and renewing a corporation in Delaware will be way higher than in other states.
- You also will pay tax on the Delaware franchise and the state where you do business. The amount will depend on the value of your corporate shares.
- Double reporting. You'll have to file your annual report in Delaware, even if you've already filed it in another state.
- Additional costs for foreign qualification. You may need to register to do business in another state if your employees are located outside of Delaware.
Interestingly, if you pay attention to the certificate of the organization, which is issued by the states of Minnesota or Colorado, then this is a beautifully designed document on a letterhead with the seal of the state (Great Seal of The State). It looks decent and inspires confidence. And the certificate issued by Delaware – some kind of paper, well, honestly! Certainly, this does not compromise the legal force, but as a rule, we want to be satisfied with everything we’ve paid for!
As you can see, the great business environment of Delaware is greatly exaggerated, so before making a decision, evaluate whether there will be any advantages from registering in the state of Delaware for you personally. If not in Delaware, where? If you haven't read our article yet, we would be happy to share our opinion about a more suitable environment for registering an LLC than Delaware. Please visit our website’s Info Center section — "How to choose a state for LLC"..
We believe that readers and our future customers will be warned against possible mistakes.
Please note that the information in this article is not tax or legal advice.