Almost any businessman wanting to start a business in the United States of America would invariably enquire the name of the state which would offer him the most business-friendly atmosphere. This aptly ensures the name of Delaware, U.S.A., like the one of legal home to one million businesses that hold its licenses. “What is so special that it attracts the best from the business? Does it offer no rules or free for all? I am curious to know” was the refrain of my business friend. In honor of those who do self-employment in India and face the music, as they call it in business are those whose sacrifices motivate me to search the best practices of the world for swift adoption by our government to reach $10 trillion economy in near future.
Let us immerse ourselves in the web of Dept of Revenue, Delaware state government.
I want to quote what the Department of Revenue offers for business:
Let me initiate you to go, step by step, to have a legal shape for your dream business unit.
1. To start with, you need a legal structure as well as a name. This legal structure gives you control, gains/losses, ownership, and liability. In a highly unlikely situation of floating a sole proprietorship firm in Delaware which embroils you with all types of legal hassles, let us learn other structures that you may be interested to consider.
2. What legal structures?
Various legal structures with full details such as ownership, control, liability, taxation and filing fee are given in the table below:
|Individual||Controlled by Owner||Owner is personally liable for all business debts||All business income is considered personal income to the owner and is taxed at personal income tax rates||None|
|Two or more individuals or other entities according to partnership agreement||Controlled by the partners in accordance with partnership agreement||All partners are jointly and severally liable for all partnership debts||individual partners’ prorated share of partnership income or loss is included on the respective income tax return of the partner and taxed at personal or co orate rates||.00
Payable to the
Secretary of State
|Two or more owners; two classes of owners; general partners and limited partners||General partner(s) may dissolve et their discretion. limited partners do no have this option. General partners generally run business, as specified in partnership a agreement||General partner(s) are fully liable for all business debts, limited partners only liable to extent of capital invested||Same as general partnership||$300.00
Payable to Secretary of State 517-1109
|“C” Corporation||Shareholders (Unlimited number)||Owners share ownership through stock. and business is managed through a Board of
Directors; certain legal regulations also apply
|Owners liability Is limited to amount of capital contributed unless acting as guarantor of corporate debt||Corporation pay tax on business income at corporate tax rate; profits distributed to shareholders and are taxed at personal income tax rate||Based on the number of authorized shares or assumed no par capital payable to Secretary of
|Sub-chapter “S” Corporation||Shareholders||Same as “C”
|Same as Corporation above; generally limited to assets in corporation||Corporation not taxed; income is taxable to the shareholders at their personal income tax rate||Based on the number of authorized shares or assumed no par capital payable to Secretary of
|Limited Liability Company||One or more members||Controlled by members or managers, as set out in operating agreement||Generally. same as “C” Corporation above||Taxed as partnership, corporation or may be disregarded depending on election made. See ‘Check the Box” regulations||$300.00
|Two or more owners; limited partners||Controlled by partners in accordance with partnership agreement||Limited and General partners only liable to extent of capital invested||Same as general partnership||$200.00 per partner not to exceed $120,000.00 Payable to Secretary of State|
One should consult a CPA/Lawyer to choose the legal structure after taking into account the nature of the business to be undertaken, capital to be contributed, the persons to contribute the capital as well as their legal status in the U.S.A.
Now that you have decided to incorporate in Delaware, what are the implications?
Corporations in Delaware must additionally adhere to the following:
1. If incorporated in Delaware, corporations must pay (in addition to Gross Receipts tax) an annual Franchise tax to the Delaware Division of Corporations. The Franchise Tax fee is based on the corporation’s number of authorized shares. If incorporated in another state but doing business in Delaware, corporations must register with the Delaware Division of Corporations.
Delaware’s One Stop Business Registration and Licensing System allows businesses to obtain a Delaware business license and register online with the following agencies:
Now time to learn about gross receipts tax for doing business in Delaware.
What is gross receipts tax?
To quote from their web, “Delaware does not impose a state or local sales tax but does impose a gross receipts tax on the seller of goods (tangible or otherwise) or provider of services in the state. Unless otherwise specified by statute, the term “gross receipts” comprises the total receipts of business received from goods sold and services rendered in the State. There are no deductions for the cost of goods or property sold, labor costs, interest expense, discount paid, delivery costs, state or federal taxes, or any other expenses allowed. (Our comment: This is very important.)
Business and occupational gross receipts tax rates range from 0.0945% to 1.9914%, depending on the business activity. In instances where a taxpayer derives income from more than one type of activity, separate gross receipts tax reporting is required. The type of business activity additionally determines whether gross receipts tax is remitted monthly or quarterly.”
(For all these professional activities, professional help is a must.)
Let me lead you to learn about W-2 or W-4 which remains the same all over the U.S.A.
What is W-2 or W-4?
The following quoted words remain the same virtually in all states and strictly followed by employers, employees or their professionals who handle their commercial matters.
“Every employer maintaining an office or conducting business in Delaware who makes a payment of wages or other remuneration to a resident or non-resident (of Delaware) must pay Withholding Tax. Withholding Tax requires that a business withhold an estimated amount of tax from its employees. New employees must file Federal Form W-4 or Form W-4A regarding exemptions. Based on that information, the employer is to withhold an appropriate tax from the employee’s compensation.
Every year, employers must supply each employee with a statement showing their total wages earned and the amount of taxes withheld on a W-2 form. Employers must mail W-2 forms to all employees by January 31st. Employers must additionally file a Reconciliation of Monthly/Quarterly/Eighth-Monthly Returns on a W-3 form with a duplicate of all W-2 forms to the Division of Revenue before February 28th.”
How does the system work in the U.S.A.?
The moment an employee reports for duties, he is handed over form W-4 which is reproduced below for information:
Form W-4 proudly proclaims that it is to be completed so that the employer can withhold the correct federal income tax from one’s salary. After completion, it is handed over to the employer by the employee. ( I heard cases where Indian employees, many of them from IT cadre got no details of W-4 withdrawals by their employers and they, equally due to ignorance, failed to get W-2 from their employers so that actual tax deducted periodically could be accounted for at the time of filing income tax return)
Form W-4 consists of 4 pages with two pages for columns to be filled in and two others like instructions.
It consists of step 1, step 2, step 3, and step 4. Step 5 is the signature column.
To fill up the personal information like name, address, and information like single or married filing separately, married filing jointly, or head of household.
Steps 2-4 if the application needs to be filled up or skip to step 5 which is the signature.
Step 2 contains details of multiple jobs or if the spouse works
Step 3 contains the number of dependents.
Step 4 through optional, requires other income (not from jobs), deductions other than the standard deduction, and extra withholding.
Step 5 contains under penalties of perjury, the employee declares that the certificate is true, correct, and complete.
Now let us know why 1.0 million legal entities have made Delaware their legal home and 60% of fortune 500 companies have incorporated themselves in Delaware?
The answer will throw the way to prosper by any state by following successful, and predictable ways of doing business. Now the reasons.
First, the statute- The Delaware General Corporation Law (DGCL) is the foundation on which Delaware corporate law is based. DGCL offers stability and predictability which is shaped by corporate-law experts and is totally free of influences by special-interest groups who try to hijack the laws to suit their hidden agenda. Equally true is the reality that Delaware legislature reviews DGCL to ensure its capacity to look into the current issues. Though certain steps have been taken to protect the investors, corporates have the flexibility to carry out their business without any hindrance from the government.
Second, the courts-Interpretation of laws has made Delaware world famous with its impartial judges respected throughout the world for their knowledge and expertise. Delaware Court of Chancery and Delaware Supreme Court with 5 judges have proved that they are highly experienced to handle the business laws and also offering options to settle the cases outside litigation. Focused, merit-based, and highly respected all over the world, they have made Delaware the most dependable state in legal matters.
Third, the case law- Both the courts have a historical tradition of issuing written opinions which have enabled them to have a history of precedence of case histories which have helped the corporations to have detailed and substantive guidance in legal matters.
I would like to quote the following para for introspection:
“One of the key concepts embodied in Delaware case law is the “business judgment rule,” which is a judicial recognition that law-trained judges should not second-guess business decisions made by directors in good faith and with due care— even if the decisions turn out badly. Along with the business judgment rule, the case law includes guidelines for directors in upholding their fiduciary duties of lay.
Fourth, the legal tradition—along with a sophisticated judiciary, Delaware has an ample supply of lawyers expert in Delaware corporate law. Delaware’s statutes and case law provide a base of knowledge for attorneys who specialize in Delaware transactional matters and who practice in front of Delaware’s courts. These expert lawyers are responsible for guiding the legislature to keep the business laws relevant in the ever-changing global business.
Finally, the Delaware Secretary of State who takes his job seriously working 15 hours a day and offers expedited services of one hour, two hours, and even 24-hour service, unheard of in any part of the world.
The Division of Corporations, in conjunction with expert Delaware lawyers and experienced supporting businesses such as Delaware registered agents, can handle nearly any situation.
The purpose of this article is not to give any legal advice and is intended to give some information purely from the web of Division of Revenue, Delaware State, the legal home of millions of successful businesses which have shown to the world that by properly following business laws which change to meet the demands of global business and having an efficient legal system of judges and competent lawyers, even a small state can lead the world. This is the lesson to be learned by us to transform our economy to the $10 trillion projections in the near future which is not too much for the youngest country in the world-India.
Disclaimer: The contents of this article are for information purposes only and do not constitute advice or legal opinion and are personal views of the author. It is based upon relevant law and/or facts available at that point in time and prepared with due accuracy & reliability. Readers are requested to check and refer relevant provisions of a statute, latest judicial pronouncements, circulars, clarifications, etc. before acting on the basis of the above write up. The possibility of other views on the subject matter cannot be ruled out. By the use of the said information, you agree that Author / Tax Guru is not responsible or liable in any manner for the authenticity, accuracy, completeness, errors, or any kind of omissions in this piece of information for any action taken thereof. This is not any kind of advertisement or solicitation of work by a professional.