[HN Gopher] Why do so many companies incorporate in Delaware?
___________________________________________________________________
Why do so many companies incorporate in Delaware?
Author : Garbage
Score : 191 points
Date : 2021-04-11 14:04 UTC (8 hours ago)
(HTM) web link (thehustle.co)
(TXT) w3m dump (thehustle.co)
| layoutIfNeeded wrote:
| Tax fraud, I mean, _optimization_.
| briandear wrote:
| It isn't fraud if it's legal.
| layoutIfNeeded wrote:
| Spirit of the law vs letter of the law.
| kube-system wrote:
| Most tax avoidance has nothing to do with ambiguous tax
| law. Most of it is very specific. And if something isn't
| specific enough, we already have regulatory agencies who
| regularly exercise the power to further clarify them.
|
| A company moving their income from one location to another
| to take advantage of lower tax rates is no different than
| the current exodus of remote-working tech workers from the
| coasts to lower tax areas.
|
| People make decisions based on the law. This isn't a bad
| thing, this is what we hope and expect to happen. If the
| laws do not produce the desired effect, that's the fault of
| the legislature, not those following it.
| yboris wrote:
| > People make decisions based on the law.
|
| But who writes the law? Look into "regulatory capture"
| and how companies tilt the tax law to their favor.
|
| If it costs less money to lobby the government into
| changing the laws than paying those taxes, the companies
| will do that. And that's what's been happening!
| kube-system wrote:
| Regulatory capture is certainly a problem, but it has
| nothing to do with letter of the law vs spirit of the
| law.
|
| A corporation following a law it wrote to avoid taxes is
| certainly following the spirit of that law :)
| sneak wrote:
| The spirit of the law isn't written down, and it is
| unreasonable to expect people to infer it and comply with
| that inference.
|
| If you believe in the rule of law, you believe in the idea
| that people should only be required to follow the letter of
| the law. The point of laws is letters - there is literally
| nothing else to it.
|
| Expecting people to follow unwritten law is not a belief in
| the rule of law.
| CivBase wrote:
| It's not fraud. The companies did nothing illegal. I'd argue
| they did nothing _wrong_ , either. The real fault lies with the
| state governments competing for corporate tax dollars.
|
| > By incorporating there, a company based in another state
| could save big on taxes and enjoy perks like unlimited market
| expansion. A flood of conglomerates took up this offer and New
| Jersey earned so much from taxes that it was able to pay off
| its entire state debt. Pressured to incentivize businesses to
| stay, other states offered their own lenient corporate tax
| policies. In this so-called "race to the bottom," Delaware
| emerged victorious.
|
| The state that wins (Delaware) gets to collect a huge,
| recurring tax check from big businesses. But it costs the other
| states far more in exchange. It's a positive for the state, but
| a net negative for the nation as a whole.
|
| > For the state of Delaware, these small fees add up to as much
| as 41% of the state's entire revenue. In 2019, they
| collectively amounted to $1.4B. For other states, the deal
| isn't so sweet: It has been estimated that the Delaware
| loophole costs other states as much as $9.5B per year in
| collective lost tax revenue.
|
| Then there's something the article doesn't touch on: the other
| states still need revenue. The other states are incentivized to
| bleed their local businesses dry, which makes it difficult for
| them to compete with the businesses big enough to exploit the
| loophole. If you're a business who can exploit the loophole,
| you're just handicapping yourself by not doing so - no matter
| how altruistic your intentions.
|
| The takeaway here should not be "businesses are bad". The
| takeaway should be "our tax code sucks and we need to come
| together as a nation to fix it". Of course, even if we fix it
| in the US, we still have to worry about the same thing
| happening at a global scale...
| tomrod wrote:
| I find efforts to skirt rules and regulations very fascinating.
|
| This reminds me of a discussion awhile back. When interest rates
| threatened to go negative due to European markets circa
| 2014-2015, I remember discussing with fellow economists just how
| negative rates could go. Ultimately, at some negative rate, we
| figured wealthy individuals would remove their capital from the
| market and put it in warehouses with armed guards. The
| maintenance cost would eventually be lower in that approach than
| to leave in banks (charging higher fees as rates increased) or
| similar.
|
| Ultimately it was speculative only, thankfully, since capital
| inflows from Europe to the US kept the rates higher than zero.
|
| Fascinating stuff!
| kingsuper20 wrote:
| Not too different than the concept of precious metals
| depositories I guess. I don't know what the yearly tithe is in
| places like Singapore for this service, but one problem would
| be the physical size of the cash.
|
| Maybe they should reissue the $100k federal reserve note for
| public consumption.
| rmah wrote:
| Incorporating in Delaware is the exact opposite of trying "to
| skirt rules and regulations". It is based on the desire for
| well defined, stable rules and relatively efficient
| enforcement.
| perl4ever wrote:
| There's something that's been bothering me for a long time
| about interest rate policy.
|
| In general, I have the impression that people take for granted
| that lower rates are "easier" even when they go negative.
|
| However, it vaguely seemed to me that _either side_ of zero
| should be considered "tightening". The sign determines which
| way money is going, but the absolute magnitude constitutes the
| friction.
|
| So I've wondered if negative rate policy was counterproductive.
|
| Does that make any sense at all?
| Denvercoder9 wrote:
| _> Ultimately it was speculative only_
|
| Not really. In e.g. the Netherlands you've to pay a 0.5%
| interest rate over the balance above EUR100k, EUR250k or
| EUR500k at most banks.
|
| Of course most people that hit the cap just spread out their
| money over multiple banks, use a savings deposit that still
| gives zero or positive interest, or invest it.
| will4274 wrote:
| > a place where corporations could frolic in the open fields of
| capitalism
|
| Do people like this style of writing?
| mdorazio wrote:
| Yes. Not everyone shares your preferences.
| mixmastamyk wrote:
| It made me laugh, is that a bad thing?
| codegeek wrote:
| TL;DR It is mostly due to the corporate friendly and experienced
| legal system in Delaware. Not so much about taxes. If you are too
| small or just starting out, you may be better off incorporating
| in your local state of residence to avoid overheads. Right?
| arjawn wrote:
| For C Corps, correct! But for LLCs my candid thoughts are form
| in Delaware only if you have plans to in the future convert
| your LLC to a C Corp (to raise venture capital from U.S.
| investors) or you really want the "prestige" of saying your
| company is from Delaware. Some people say this matters to them
| and if it does, it is your business, your choice! Otherwise, I
| recommend Wyoming. Why? Wyoming is the most popular state for
| non-residents who are online businesses, e-commerce businesses,
| or business owners who want an easy and simple way to form and
| manage their company. It's the most popular state among
| https://startpack.io customers, has lower annual fees ($50 vs
| $300 in Delaware), a low filing fee ($100), and was the first
| state to ever create the LLC. Also don't sleep on Wyoming's
| prestige as well :) It has a friendly business environment,
| also allows you to protect your personal info when filing with
| the state (use the registered agents info) and has even been
| called "The Switzerland of the Rocky Mountains" (I don't know
| who coined this term though haha)
| praptak wrote:
| Tax havens are parasites on tax systems of other countries but
| tolerating a similar shtick within a single country is a separate
| level of fucked up.
| ipaddr wrote:
| Corporate tax havens, income tax havens, property tax havens,
| sadles tax havens are all part of the one side of this system.
| On the opposite side you have over serviced areas, daily door
| to door mail delivery, public transit, universal health care
| all available in over taxed havens.
|
| The federated nature of united states allows each state to set
| different tax rates / service levels. These states compete with
| each other to attract people / capital.
|
| The nature of how the system works means tax havens are not
| parasites. They are part of an ecosystem system that competes.
| The freedom to make those changes is what makes them successful
| over a system who would limit that.
|
| On the country level its more extreme with currency havens.
| VWWHFSfQ wrote:
| Do you consider places like Texas and Florida to be "tax
| havens" because they are increasingly attracting more and more
| people to move there from places like California and New York
| for personal tax advantages?
| praptak wrote:
| Only to the degree to which those people avoid taxes on money
| that they actually make in other states.
| arjawn wrote:
| Have learned a ton about LLC formation in Delaware + other states
| from working on https://startpack.io.
|
| tl;dr if you live in the US form an LLC in your home state, if
| you don't Wyoming is a very popular option for online, digital
| businesses / ecommerce businesses, and Delaware is so popular
| because, in my opinion, it has "prestige" but as an international
| resident, you won't automatically get tax savings by being in
| Delaware vs Wyoming for example (if you don't have a physical
| presence in the US)
|
| If you live in the US -> form an LLC in the state you live in. If
| you form an LLC outside of your home state you'll be required to
| register that out-of-state LLC as a Foreign LLC in your home
| state. For example, if you form an LLC in Nevada (but you don't
| live there), then you'll be required to register that Nevada LLC
| in your home state (as a Foreign LLC) in order to do business in
| your home state. This means you now have 2 LLCs (one in Nevada
| and one in your home state) so you have to pay 2 State filing
| fees and 2 Annual report fees
|
| If you don't live in the US -> you can form in any state. If you
| are an online digital business Delaware and Wyoming are the two
| most popular states.
|
| Delaware is the most popular state in the US for business
| formation. I think part of this is because of 1) the prestige of
| creating a "Delaware C Corp" in the state and 2) it does have a
| very solid business reputation. However if you are an
| international, online business, Delaware might not be the best
| option if you are trying to save $. In Delaware there is a $300
| annual payment due to the state each year.
|
| Wyoming is extremely popular for LLC formation for international
| residents because of the lower ongoing annual fees ($50 vs $300
| in Delaware). Wyoming has also built a reputation as one of the
| most popular state for non-residents who are online businesses or
| e-commerce businesses. Also dont sleep on Wyoming's prestige as
| well; it has a friendly business environment and has even been
| called "The Switzerland of the Rocky Mountains."
|
| Again the thing here which is important to highlight is you end
| up creating twice the work / twice the costs if you live in the
| US and form an LLC outside of the state you "do business in" so
| be careful here!
|
| And internationally, if you're forming an LLC, you can choose any
| state and if you don't have a physical presence in the US, you
| actually might not have a US _tax_ filing requirement, but you do
| have an _informational filing requirement_ if you are a foreign
| owned US Single Member LLC (Form 5472 /1120). If you are a
| foreign owned multiple member LLC, you file a partnership return.
| And if you are an LLC that elects to file as a C Corp you file a
| C Corp return!
| throwaway483284 wrote:
| > informational filing requirement if you are a foreign owned
| US Single Member LLC (Form 5472/1120).
|
| Lets say hypothetically someone operating IT consultancy
| service didn't know about that requirement, is running company
| 5+ years, has EIN, paid LLC Delaware annual tax but never
| filled those forms.
|
| 1. What in that kind of hypothetical scenario should that
| person do?
|
| 2. Does the penalty for not filling it would affect that person
| LLC only (as disregarded entity)? so basically he would not be
| personally liable ?
|
| 3. Does your site offer filling those forms as a service?
| arjawn wrote:
| Great q, I can see if a CPA in my network has a good answer
| to this (feel free to shoot me an email, link in bio, with
| more context as well)
|
| And yes we can help with these filings but the circumstance
| above where a previous filing wasn't completed is an
| interesting case so will have to see what the best option is
| give that!
| yboris wrote:
| Delaware is considered a tax haven / tax shelter
|
| https://www.investopedia.com/articles/personal-finance/09251...
|
| ps - for this reason I prefer to call Delaware "the scumbag
| state"
| briandear wrote:
| Maybe states should learn from Delaware. The minimum tax
| required for an LLC in California is $800. So even if you have
| an LLC that makes no money, you still have to pay California
| $800 per year.
| arjawn wrote:
| California actually started to waive this fee in year 1. "As
| of June 2020, the $800 franchise tax fee has been waived in
| the first year in California."
|
| However even with this fee waived it still makes A TON OF
| SENSE to file your LLC in the beginning of the year vs the
| end (OR do a delayed effective filing
| https://www.startpack.io/blog/what-is-an-llc-delayed-
| effecti...)
|
| Otherwise, you end up paying the annual fees twice in ~ 1
| year.
|
| Here's an example before CA started to waive this fee of how
| brutal this could be in CA for LLC owners:
|
| California has an annual franchise fee tax of $800. This fee
| is due every calendar year, not every 12 months.
|
| Calendar Year: January - December
|
| Every 12 Months: 12 months from Today
|
| So this means if you were to start an LLC that was "born" or
| "officially created" on December 31st, 2020, you would be
| responsible for paying the full $800 franchise tax fee for
| the year of 2020!
|
| Fast forward to January 1st, 2022, one year and one day
| later, even though essentially only one year has passed by,
| instead of owing $800 to the state of California... you would
| owe $1600!
|
| To make things worse, the first annual franchise tax fee
| payment is due within the first 3-4 months from when your LLC
| is formed, and from then on, due by April 15th each year. So
| if you were to create a California LLC that went in to
| existence on December 31st, 2020, you would have to pay $1600
| in the first 5 months!
| mixmastamyk wrote:
| Filed under, "information that would have been useful a
| week ago." :-D
| doktorhladnjak wrote:
| Everyone knows the joke version of Delaware's moniker "the
| first state" is "the worst state"
| pwned1 wrote:
| Delaware is generally no different than any other state. The
| state where you do your business activity is where you pay
| taxes, not necessarily the state where you formed your business
| entity.
| arjawn wrote:
| Correct, this is an important note for international LLC
| owners as well as many folks think the "in-state" US tax laws
| apply, however, if you don't have a US physical presence you
| might only have an informational filing requirement (vs a US
| 1040NR tax filing requirement). I wrote a full thread on this
| here in case anyone is curious! https://twitter.com/arjmahade
| van/status/1380556571395112960?...
| Pxtl wrote:
| So, when a state operates in California but pays its Delaware
| subsidiary to hold its IP and other intangible assets as a tax
| dodge, does it not have to pay Californian sales taxes on this
| purchase?
| doktorhladnjak wrote:
| I doubt intangible assets are subject to sales tax
| gamblor956 wrote:
| A) Yes, it still collects sales tax on the purchase. (Sales tax
| is owed by the buyer, not the seller). B) The company would
| still owe CA tax on the revenue from selling the phone. C1)
| California would disregard the IP royalty, so no deduction for
| the Delaware shenanigans. C2) Other states will grant the
| deduction...but tax the royalty on nexus grounds, and the
| subsidiary won't have apportionable expenses to offset the
| royalty income, resulting in a higher net tax burden for the
| corporate group .
| IncRnd wrote:
| There would be no difference in IP taxation if your example
| were 100% in California.
| pwned1 wrote:
| Sales taxes are generally applicable to the final retail sale
| of a good for ultimate use, not for transfer of intellectual
| property rights.
| Pxtl wrote:
| I haven't worked on the money side of a business - businesses
| are allowed to claim an expense for purposes of reducing
| their income tax burden, but they don't have to pay sales
| taxes on that same expense if it's internal to an associated
| business? That seems perverse.
|
| "I spent money on X"
|
| "Okay where's the sales tax payments for X?"
|
| "The money went to myself, so there's no sales tax"
|
| "So then you didn't spend the money?"
|
| "Yes I did."
| pwned1 wrote:
| They do, it's called a use tax. So if you buy paper for
| your business and don't pay sales tax, you'll generally
| have to pay the same amount in use tax.
| djoldman wrote:
| It seems like there are many situations where a company is
| definitely following all laws and is extracting value or relative
| value by making certain decisions that have tax or other
| advantages.
|
| It also seems like the general public directs outrage or anger at
| these companies in response to these decisions.
|
| Why the anger at the companies and not the lawmakers who made the
| system in which the companies are _legally_ operating?
|
| Is it difficult to look up who moved the laws forward? Is it just
| because it's easier to point fingers at a company?
| artem247 wrote:
| There are many levels to this but generally there is an idea
| that politics and especially laws like these are shaped by
| those who benefit from them the most - big businesses who can
| afford lobbying.
|
| In terms of theory there is a Marxist notion of 'ruling class'.
| In regards to capitalism Marxists think that ruling class of
| capitalism is big business, not the State itself. Politicians
| are in a weaker position and just implement the will of the
| captains of the industry. That is rather extreme notion but
| still one can see traces of it in society.
|
| And it generally goes both ways - companies have poor (but
| legal) working conditions and oppose any legislation or action
| that would change it by being anti-union, by funding thinktanks
| that do studies that prove raising minimal wage would lead to
| overall decrease of jobs etc.
| tenebrisalietum wrote:
| Here's how I think the average joe sees things. Most people
| here may not fall into this category, but certainly know people
| who do:
|
| A) Politicians only listen to money; even ones that are on your
| side; laws therefore are skewed towards those who have money.
|
| B) Companies donate large sums of money to politicians;
| therefore they listen to companies.
|
| C) Very rich individuals also donate large sums of money, but
| the average joe can't figure those names out on their own and
| will rely on rumor mills from social media, and media
| propaganda from his/her political tribe.
|
| So people will get mad at companies first because they are more
| visible and the fact that it's more possible for a non-rich
| person to get people to stop spending money at a corporation
| than making a lawmaker do what you want.
| AndrewKemendo wrote:
| Here's the simple answer for startup founders (at least when I
| was raising money in 2014-2015):
|
| Institutional VC won't take you seriously otherwise
| AngryData wrote:
| The exact kind of thing interstate commerce law exists. And yet
| we instead fraudulently use it for the war on drugs and
| restricting what can be produced and sold in-state.
| dmckeon wrote:
| Delaware is not the only US state that has tuned its laws to
| attract certain types of business and financial activity:
|
| https://www.theguardian.com/world/2019/nov/14/the-great-amer...
| loosetypes wrote:
| I'd recommend the book Moneyland.
|
| The focus is more on international, rather than inter-state,
| arbitrage of legal systems by persons/corporations but is there
| really that much difference between the rationale for putting an
| HQ in Dublin and incorporating in Delaware if the goal is
| selectively operating under favorable legal frameworks?
|
| Bonus, I'd never put together that offshore is just a socially
| acceptable alternative for the word pirate a la pirate radio.
| marktheknife wrote:
| The tax part is pretty inaccurate. If you use business IP and
| transfer it to Delaware you will not avoid California tax on
| income from that IP. The unitary business and formulary
| apportionment approach of California income tax (also the
| dominant approach of multistate income tax in other states)
| easily beats that strategy, by treating formally separate
| entities as one for taxation. The sort of income shifting
| described in the article works better in international taxation
| since there the dominant approach is a "separate accounting" aka
| separate entity approach.
|
| Indeed, even the Geoffrey case the article notes is famous for
| Geoffrey _losing_ in South Carolina, and having its income taxed
| in that state.
|
| Nonbusiness income is taxed to commercial domicile, which does
| promote moving headquarters to a tax haven. But much less income
| is considered nonbusiness income than you'd expect, and further
| commercial domicile is a separate concept from place of
| incorporation.
|
| By far the dominant reason for Delaware as a corporate place of
| incorporation is its well developed corporate law and courts. It
| is more favorable to corporations in part, but not excessively so
| --VCs would not be pressuring corporations to incorporate in
| Delaware if it purely screwed shareholders at the corporation's
| benefit.
|
| There are also estate planning and asset protection benefits of
| using Delaware (and certain other states) LLCs.
| supercanuck wrote:
| It is actually simpler than this, and that is it is extremely
| difficult to pierce the corporate veil in Delaware. It is
| considered one of the strongest states for segregating the
| officers and shareholders except in cases of outright fraud.
| JumpCrisscross wrote:
| > _well developed corporate law and courts_
|
| To put this into context, the average time in 2020 for a civil
| case to go from filing all the way to an appeal to the Delaware
| Supreme Court was 185.8 days; from submission to the Supreme
| Court, 32.8 days [1].
|
| California's courts don't publish this information regularly,
| but the last time I checked, the comparable statistics were 3
| years and one year.
|
| [1]
| https://courts.delaware.gov/aoc/annualreports/fy20/doc/2020S...
| _page 8_
| [deleted]
| jawns wrote:
| Exactly right. I'm a Delawarean, and in my former career as a
| journalist I wrote about this phenomenon. It's all about the
| courts. It is a risk mitigation strategy for businesses. Having
| extensive, well-defined case law makes things more predictable.
| toyg wrote:
| One of the peculiarities of the US is how you guys managed to
| effectively bootstrap _industrial districts at continental
| level_ for the weirdest meta-stuff, from newspapers to movies
| to corporate accounting.
| ghaff wrote:
| Newspapers? I would have said those were pretty
| distributed. Yes, a couple of the big national ones are in
| NYC, but that's where the population is. Finance is
| certainly another example. Obviously at least a certain
| subset of tech. Oil.
|
| Is this really that unusual though? And, to the degree it
| is, how many other large countries have the same sort of
| distributed large population centers?
| JumpCrisscross wrote:
| > _how you guys managed to effectively bootstrap industrial
| districts at continental level for the weirdest meta-stuff,
| from newspapers to movies to corporate accounting_
|
| This is a common market flexing its economies of scale.
| India and China do similarly. If the EU could get its act
| together, it, too, would reap these benefits.
| bradgessler wrote:
| When it comes to running a business in the US, it's almost
| better to think about each state as if it were its own
| country because you're subject to a substantial amount of
| state laws. You can't incorporate at a federal level--only
| state level.
|
| Federal law does it exist, but it feels like more a set of
| minimal standards. Most of the differences that people pay
| attention to are state laws because they usually go above
| the federal laws and regulations.
| vmception wrote:
| Wyoming has had a Court of Chancery for several years now too
|
| They and any state could always lean on Delaware case law
|
| And if you don't like Delaware established precedent then you
| can argue for the opposite in any other state (like Wyoming)
| where the judges are less bound to the established case law
|
| Delaware is overrated
|
| The race to the bottom never ended and is much larger than a
| collection of states, it is international with many
| permutations and many legislatures interested in attracting
| business, because they're a business too
| jawns wrote:
| I have no legal background, so I could be wrong, but I
| would think that in both DE and WY the established
| precedent is overturnable, given the strength of your
| argument. If that's so, then it seems like the preference
| for WY is that you don't need as solid an argument.
|
| But rarely do businesses know which precedents they'll want
| to challenge at incorporation time, so it's advantageous to
| go with the state that is the most predictable and whose
| court system is relatively efficient.
| naniwaduni wrote:
| > And if you don't like Delaware established precedent then
| you can argue for the opposite in any other state (like
| Wyoming) where the judges are less bound to the established
| case law
|
| That's the _opposite_ of what you want.
| vmception wrote:
| Not if you don't like the established case law and want
| to argue for a completely different outcome. Which is
| just me saying the exact same thing a second time. Let's
| see if we get to a third rehash of this optional
| preference.
| naniwaduni wrote:
| You do not want, at the same time, a jurisdiction that
| leans on well-established case law, but also does
| whatever the heck it wants because you're arguing for it.
| Not unless you're in a privileged position to influence
| the court in a way that anyone coming up against you
| can't, anyway.
| rsj_hn wrote:
| Yup, this article falls squarely in the "misinformation"
| category, and the author has no experience with tax law, nor
| does he cite any authorities to support the tax avoidance
| thesis. He's just winging it, improvising, about corporate tax
| law. It's crazy how low journalistic standards have fallen as
| the line between news article and "personal blog" has been
| blurred.
|
| I am not ascribing ill motive to the author. Just incompetence
| in trying to write about a very complex topic that is far out
| of his depth, and doesn't allow for simple moralistic summaries
| like "Big biz not paying their fair share!".
| lifeisstillgood wrote:
| It's not (just / only) taxes - Delaware has for a century or more
| _not_ imposed changing rules and regulations on businesses
| registered in its state. It has basically left things well alone.
|
| If this was outside the USA then Delaware would just be some tiny
| island tax haven. But it's a full fledged State in the most
| powerful country in the world. Businesses in Delaware still have
| to abide by every Federal law and regulation, and every Federal
| tax. It's not (quite) a no laws, no rules hideaway.
|
| What they don't have to do is guess which State's local problems
| are going to hamstring them in five years.
|
| Delaware incorporation gets you in the USA market at the
| _national_ level. National America laws affect you but local
| State politics you can safely ignore. And be confident that the
| changes coming nationally will be clearly signalled in California
| or Texas first.
|
| Yes there is tax arbitrage opportunities - but we are seeing
| similar things in Netherlands or Ireland in the EU. And when
| things got too out of hand then the other states would all "have
| a quiet word" with Delaware. Similar to how the Dutch Irish
| sandwich is it seems coming to an end.
|
| So yeah, businesses like stability and only having to look in one
| direction, much more than low taxes but more complex
| environments.
|
| Edit: It's worth reading up on the Dutch / Irish sandwich. In
| some ways yes it is egregious (and yeah a lot of the time it is -
| franchises that claim all the profit resides in a logo or a
| policy book - we all know that's crap). But that's a question of
| degrees - if I sell McDonalds burgers I will make more than
| selling some unbranded stuff. So IP does have value. Now let's
| say I am licensing wind turbine generators for a wind farm -
| designed in UK, built in Germany, installed in France by a Dutch
| company with Spanish investors. Whose laws apply to the licensing
| agreement ?
|
| This gets really hard really quickly - which takes us back to
| Janet Yellen and minimum OECD tax rates. By stopping the race to
| the bottom, it does not matter so much - tax is paid, and gets
| shuffled in somewhere.
|
| I know I am banging on but, getting outraged by tax dodges like
| this will prevent us taking the big wins - if there is a global
| minimum tax rate a _huge_ amount of wasted effort on tax
| avoidance goes away, and it opens up real possibilities for
| clamping down on tax evasion.
|
| Companies in Delaware mostly pay tax in the right range - and
| those that don't, trust me, the way to deal with it is to hire
| more IRS agents - probably the only branch of Government that has
| a 4-10x ROI year on year :-)
|
| tl;dr tl;dr
|
| There is an order to fixing taxes either globally or between
| states. First set a global minimum corporate tax rate (see
| OECD/Yellan). Then clamp down on tax evasion by forcing
| beneficial ownership to be made public globally. Only after all
| that is it worth fighting over who get what cut of the pie. There
| is no global tax pie right now - we need to bake it before we
| discuss cutting it.
| pbu43 wrote:
| > how shall I put this ... straw chewing hick-town councillors
| (sorry, State Senators) who think cows made America great.
|
| Considering America wouldn't exist without food and the hick
| towns that supply it, and speaking as a straw-chewing hick from
| one of those towns who I guess manages to smash enough keys
| together to occasionally write software in your eyes, please do
| not so condescendingly dismiss the half of the country you
| clearly don't understand. We can just as easily dismiss you and
| your arrogantly narrow view of your fellow citizens. It's those
| exact globalist policies you're trumpeting, and their
| ideological underpinnings, that forced the very people who feed
| you into a position where you can comfortably shit on them as
| you are here.
|
| You didn't need this classist, obnoxious swipe to make your
| point, and you absolutely knew that given how you hedged it
| linguistically (twice alone in my quoted portion). It says far
| more about you and your beliefs than you think it does that you
| said it _and_ apologized for it in the same breath.
| tenebrisalietum wrote:
| America has an obesity epidemic. We can exist with less food.
| pbu46 wrote:
| And do you have a plan to connect that (otherwise correct)
| sentiment to the point I'm making? Or are you implying that
| because America has an obesity epidemic the point is
| invalid?
| lifeisstillgood wrote:
| Fair enough.
|
| Changed.
|
| On the other hand, as a European, the very few State Senators
| I have met / known have been decent honest people - but very
| focused on _local_ (to the State) issues - or on what I would
| call global always on politics like decent labour laws etc.
|
| But then again, their very _job_ is to focus on the local.
|
| Hmm, re-reading this bit:
|
| >>> It's those exact globalist policies you're trumpeting,
| and their ideological underpinnings, that forced the very
| people who feed you into a position where you can comfortably
| shit on them as you are here.
|
| I am not sure I get this part ?
| pbu44 wrote:
| Are you saying that the elected position of state
| legislator comes with the assumption of indecency and
| deception and that it strengthens your perspective that
| you've known a few who aren't? As a European (what a
| surprise), you are aware that Colorado is more akin to
| Switzerland than one of its cantons, right? The U.S. is
| more comparable to the EU than one of its constituent
| nations. Knowing that, why does "State Senator" vex you so?
|
| The line you drew between decent, honest, and representing
| the people who elected them is even more bizarre than what
| brought us together in the first place. If it isn't
| apparent why an elected official from rural Iowa doesn't
| have global tax policy on their radar, you are not
| qualified to be speaking about American politics,
| economics, or legislative structure in the slightest.
| smokelegend wrote:
| "Honest politician[s]"...... ummm here in the US, there
| is no such thing. Every single politician is stinking
| dirty in some way, it may not be seen, but the smell can
| not be denied.
|
| Politics is a dirty game. [FULL STOP]
| pbu45 wrote:
| Your incredibly nuanced and substantive opinion is right
| up there with other world-shattering perspectives like
| "cancer is bad". Not sure why you're sharing it with me,
| though, since the person who referred to politicians as
| honest is one above me.
|
| For future reference, the period is also known as a full
| stop from the days of the telegraph. So by typing a
| period at the end of your remarks, you've introduced a
| full stop and need not spell out another. When one says
| "full stop" aloud, they're enunciating a period verbally
| to reinforce a point, which is why it's a spoken idiom
| and not a written one (since full stops are a function of
| intonation in speech and not a written mark).
| cletus wrote:
| This is a good overview.
|
| I honestly don't understand how these IP transfers are legal and
| continue to be legal. In the example from this article if the
| Delaware subsidiary bought the tennis balls from Vietnam for $10m
| and sold them to the California subsidiary for $80m, this is
| actually illegal. It's called transfer (mis)pricing. The general
| principle is that such pricing should be at arm's length. But for
| some reason it's totally fine for IP.
|
| Not only does this avoid state taxes but it is the basis for big
| tech companies dodging federal taxes by transferring their IP to
| Irish subsidiaries and then paying "royalties".
|
| So I'm a big fan of two reforms:
|
| 1. Profit apportionment. If 20% of your revenue comes from a
| particular state or country, that jurisdiction gets to tax 20% of
| your profit. This whole transfer pricing nonsense has to end and
| it's the real cause of the race to the bottom; and
|
| 2. Much higher property taxes for real estate owned by
| corporations rather than individuals. Corporate anonymity with
| real estate is a real scourge and drives speculative bubbles,
| money laundering and simply parking money in real estate, none of
| which does anyone any good.
| yokaze wrote:
| 2. I would suggest to have the same tax for everyone, but make
| it (and rent) deductable to a certain degree, if it is for your
| primary residence .
|
| Ideally, it should be net-zero for people living there.
| cletus wrote:
| So real estate has a number of problems:
|
| 1. It's clearly used for money laundering and hiding money
| from hostile governments. In Europe, this is a huge factor in
| the London real estate market.
|
| 2. Cities die when people can't afford to live in them. This
| is exacerbated by restricting supply to simply park money.
| Often the ultra-wealthy buy a place where they'll spend 3
| days a year because they like that place (eg NYC). In doing
| so, they're contributing to making that place worse. This
| behaviour should have a cost;
|
| 3. There are cities around the world that have pockets that
| are essentially vacant because of (2). Condos in Manhattan
| have a notoriously low occupancy rate. I've heard Tel Aviv
| has this issue as well. There are many others;
|
| 4. In many places it's more profitable tp produce
| (unoccupied) ultra-luxury property. A lot of the building in
| NYC is north of $4000/square foot. That's... insane.
|
| 5. Property taxes in NYC, as one example, are highly
| regressive. a $1m condo may have property tax of $1200/month.
| A $100m apartment may only incur $16k/month in property tax.
| The counterargument is that the more expensive apartment uses
| just as many services. Personally I think subsidizing ultra-
| luxury property is just bad.
|
| Some jurisdictions (eg Vancouver) have tried to punitively
| tax "non-working" real estate, which is to say real estate
| that sits vacant. I don't think this has had much impact and
| it's probably really easy to game (eg rent it out to a family
| member notionally).
|
| My philosophy is that:
|
| 1. Ultra-luxury properties are generally speaking bad for a
| city. They take up a disproportionate amount of space and
| tend to add nothing to the city. It's fine that they exist
| but we shouldn't be subsidizing their construction and
| continued existence;
|
| 2. Providing rental units for people who live in the city is
| a better use of capital than parking foreign money. As such,
| both parking money and foreign investment should be taxed at
| a higher rate. Local landlords are better than remote
| landlords (since those local landlords are part of the city).
|
| Personally I think that if you own property in NYC, for
| example, then the state and city of New York gets to tax your
| income as if you were a resident. LLCs to hold property are
| the obvious dodge so these need to be taxed punitively.
| yokaze wrote:
| My philosophy is, whatever is bad, make people pay so much
| for it, that it will be (net-)positive. If they still do
| it, what's the problem?
|
| > 1. Ultra-luxury properties are generally speaking bad for
| a city. They take up a disproportionate amount of space and
| tend to add nothing to the city. It's fine that they exist
| but we shouldn't be subsidizing their construction and
| continued existence;
|
| I am not so sure about the first part, but I agree with the
| second. The proposal I made would in fact be a slightly
| progressive tax. I have no problem someone buys a
| $10million apartment in NYC and keeps it for a holiday in a
| year, if it say, costs $1 million in taxes per year and
| pays for a lot of other apartments, public transit, etc...
|
| > 2. Providing rental units for people who live in the city
| is a better use of capital than parking foreign money. As
| such, both parking money and foreign investment should be
| taxed at a higher rate. Local landlords are better than
| remote landlords (since those local landlords are part of
| the city).
|
| I have to disagree here. On two counts.
|
| First, parking foreign money can be utilised to provide
| rental units who live in the city. We "only" have to frame
| the laws and tax code accordingly, and who cares then, what
| nationality the money has.
|
| I also have to disagree on the assertion that local
| landlords are better than remote ones. Local ones may care
| for the city, or they care more about earning more money,
| and know all the tricks in the book. Remote ones may not
| care much about the city, but they also may simply have no
| idea of the local market, and do not want any trouble. You
| may guess, how my experiences were in that regard.
|
| I think, we should not tax/punish people based on our
| prejudice we may have on them, but formulate a tax code,
| which punishes "bad behaviour" regardless of the
| nationality of the actor.
| mensetmanusman wrote:
| I like this tendency, eg France wants to ban air travel
| intra-France.
|
| In my mind, it makes more sense to tax that travel to
| build funds for syngas development and guide consumers
| towards train through the price increase.
| sprafa wrote:
| People are waking up to this slowly. Globalization of
| capital is destroying the ability of local populations to
| purchase real estate in the places they themselves live.
| Multiple cities in Europe, even outside of London, are
| suffering from extreme Airbnbnization, where buildings are
| pricing out locals just because it's 3x to 10x more
| profitable to build them for airbnbs.
| ac29 wrote:
| I'm curious where in Europe has a 10x difference between
| short term and long term rent. This suggests an Airbnb
| unit renting for $100/night (and maintaining 100%
| occupancy all year) could only rent to a local long term
| renter for ~$300/month?
| thaumasiotes wrote:
| > Profit apportionment. If 20% of your revenue comes from a
| particular state or country, that jurisdiction gets to tax 20%
| of your profit.
|
| There's already a local tax on revenue. Sales tax.
| ac29 wrote:
| Sales tax is not a tax on revenue, its a tax on purchases
| (paid by the purchaser). Perhaps you are saying business
| taxes should be non-existent, but in most places they do
| exist.
|
| Also, dont confuse revenue and profit. While some locales do
| have a gross receipts tax, taxing profits is much more
| common. This, in theory, incentivizes companies to pay out
| their revenues in the form of wages, R&D, building things,
| etc.
| Retric wrote:
| Sales tax isn't collected on components of products. So an
| apple farm sells apples to a factory without any sales tax
| etc.
|
| Taxing on point of sale is very useful if you want to capture
| externalities, but it's got minimal effect on the supply
| chain.
| thaumasiotes wrote:
| How is that relevant here? The notional problem consists of
| Apple Inc. selling an iPhone and then paying a royalty on
| the trade dress to Delawapple Inc. There is no supply chain
| involved, so it doesn't matter if the supply chain is
| unaffected.
|
| The proposal above is that California should get to assess
| taxes against Apple based on Apple's revenue from
| California. And they do. That's what a sales tax is.
| gamblor956 wrote:
| As discussed in other comments, the notional problem
| doesn't actually exist. The article was simply wrong on
| the Delaware Loophole in general; it still works in a
| handful of small states but it hasn't worked in any
| respectably sized state for longer than most people on HN
| have been alive.
|
| Apple wouldn't get a California deduction for its
| "payment" of a "royalty" to Delawapple for an iPhone sold
| in California. It would get assessed a tax on the income
| it makes _selling_ the iPhone to a buyer.
|
| Note also: sales tax is a tax owed by the _buyer_ of a
| good, not the seller. It is simply collected by the
| seller because it is more efficient for the seller to
| handle sales tax remittances than for each of their
| customers to do so. It 's less overall work, it's easier
| to audit, and the seller can simply send the collected
| amounts in with their other periodic tax payments.
| thaumasiotes wrote:
| > Note also: sales tax is a tax owed by the _buyer_ of a
| good, not the seller.
|
| There is not even a theoretical difference between these
| two ideas.
| gamblor956 wrote:
| The tax strategy in the article (aka the "Delaware Loophole")
| doesn't actually work to avoid state taxes. In fact, the
| "Delaware Loophole" as it _was_ called has not worked in most
| states for decades. (As another commenter noted: the sole
| example given of this loophole was a miserable failure. The
| Toys R US group ultimately ended up owing _more money_ to South
| Carolina after its maneuver than it did before.
| https://casetext.com/case/geoffrey-inc-v-south-carolina-
| tax-.... )
|
| Two reasons the "Delaware Loophole" doesn't work:
|
| 1) In most states, related companies are treated as a unitary
| group for tax purposes. (See for example, California.) This
| means that generally, intercompany transactions between the
| related companies are treated as not existing for tax purposes.
|
| 2) In states which don't have unitary group methods, they
| simply tax the IP lease itself on nexus grounds, as South
| Carolina did in the Toys R Us/Geoffrey case (Geoffrey LLC was a
| subsidiary of TRU that existed solely to lease the TRU IP).
| TRU's IP-expense deduction in South Carolina ended up being
| fairly small, after taking into account their low profits, so
| SC simply granted the deduction to TRU...and decided to tax
| Geoffrey on the IP lease on nexus grounds. Unfortunately for
| the subsidiary, they had no expenses apportionable to South
| Carolina (which is usually the case for IP holding companies),
| and so all of the lease was taxable in South Carolina. The TRU
| group ended up paying significantly more in taxes to South
| Carolina after attempting the Delaware loophole than it did
| doing things the honest way. (And this result was predictable
| from the very beginning based on the nexus laws even as they
| were back then, which is why companies don't do this within the
| U.S.)
|
| Edit:
|
| On your proposal #1: this is how income taxation generally
| works in the U.S. States already get to tax a company's income
| earned in the state, so long as (a) the company has a physical
| presence in the state or (b) isn't physically located in the
| state but does enough volume or revenue in the state to justify
| imposing tax. (See "nexus").
|
| At least in the U.S., the real game is about how to apportion
| _expenses_ to a state. Every state uses a different formula,
| and some, like CA, let taxpayers _choose_ the formula most
| beneficial to them. (Note: apportionment is nothing like
| transfer pricing.)
|
| Outside of the U.S.: If a business earns 20% of its revenue
| from directly Country A, then taxability is not a transfer
| pricing issue, it's a tax treaty issue. But you presumably mean
| the following: a big (foreign) business sets up a smaller
| business locally, and "leases" that IP to the local subsidiary,
| reducing the profits (and thus tax) the smaller company pays to
| the local tax authority. In that case, there isn't really
| anything the local country can do, because the situation is no
| different than the case of _Unrelated Local Company A_
| licensing an IP from Big Company in Other Country B. Many
| countries wouldn 't allow that sort of tax discrimination based
| on company ownership, and in the countries where it would be
| allowed, foreign investment would drop precipitously because it
| would be riskier and less profitable to do business in that
| country.
| meowkit wrote:
| 1) How does this get enforced? What stops Ireland, Camans,
| Monaco, or Luxembourg (note: I am not familiar with the most
| popular tax havens) from continuing to have low corporate tax
| rates?
|
| 2) How to prevent corporations from paying
| individuals/employees to manage property? Or giving them a cut?
| yokaze wrote:
| > 2) How to prevent corporations from paying
| individuals/employees to manage property?
|
| How should managing the property make them tax exempt? Do
| they transfer the ownership?
| dsr_ wrote:
| Let's say that BigCo wants to buy a $50M office building on
| the outskirts of the capital city of Taxis, where corporate
| owners of real estate are taxed at 8% of the market value
| of the property each year but individual owners are taxed
| at 1% per year.
|
| BigCo writes a contract with Jane Schmidt, a citizen of
| Taxis. BigCo will loan Jane $50M to buy an office building,
| and Jane will lease the building only to BigCo. At the end
| of thirty years, Jane will have paid back the loan via the
| payments that BigCo has made, including necessary
| maintenance (handled by a BigCo subsidiary) and insurance
| (handled by BigCo's main insurance company). BigCo will
| also pay all reasonable and actual legal fees arising from
| Jane's ownership of the building. The contract provides
| that at any three year boundary or in the event of Jane's
| death, BigCo can direct Jane or her estate to sell the
| building to an entity of BigCo's choosing; Jane will get a
| fee but owe the remainder of the sale price to BigCo.
|
| Jane is happy because she makes some money for the next
| three to thirty years. BigCo gets to avoid 7/8ths of the
| tax burden in exchange for a much smaller sum going to
| Jane. BigCo doesn't show the building as an asset but as a
| rent expense plus an income-generating loan.
|
| At the end of the contract, BigCo directs Jane to sell the
| office building to Steve Jones for the current market price
| of the building, Steve having a similar deal in place with
| another company.
| yokaze wrote:
| First off, I agree with you on principle. I do think it
| is too prone for circumvention. Whatever criticism is
| thrown at you in detail, it can likely be adjusted in the
| contract accordingly.
|
| So, keeping that in mind, (and that IANAL) lets develop
| it further.
|
| I have trouble seeing that as being a legal contract, as
| all the rules are in favour/at will of the BigCo. I
| believe that renders such passages void in some
| jurisdictions. E.g. It is hard to claim that you can sell
| at market-rate, if there is no free market, since the
| buyer is at BigCo's choosing.
|
| Assuming it is legal, it leaves Jane completely at the
| risk of deprecation and the will of BigCo to make use of
| it, and leave Jane with the debt of the difference.
|
| Selling a property is usually accompanied by a property
| sale tax (at least in Europe). One of the reasons a lot
| of private people found companies to actually own their
| property.
|
| Worst problem though I see is, that BigCo is here at risk
| that there could be a regulatory change, which renders
| parts of the contract invalid, making Jane not only owner
| in name, but also in fact.
| a1369209993 wrote:
| > BigCo will loan Jane $50M to buy an office building,
| and Jane will lease the building only to BigCo.
|
| Jane is a corporate owner of [this particluar piece of]
| real estate, and is taxed at 8%.
|
| > The contract provides that at any three year boundary
| or in the event of Jane's death, BigCo can direct Jane or
| her estate to sell the building to an entity of BigCo's
| choosing
|
| Also (seperately from the previous bit), Jane doesn't
| actually own the building.
| cletus wrote:
| > What stops [tax havens] from continuing to have low
| corporate tax rates?
|
| Nothing. But if Apple has $100B (out of $300B), as an
| example, in revenue in the US then the US gets to tax 1/3 of
| their income. If other countries decline to do likewise, well
| that's their choice. But tax havens are a scourge.
|
| We've gone full Ayn Rand here where the people whose wealth
| was made possible by the stability and infrastructure in the
| countries they made that wealth in want to avoid at all costs
| paying for that stability and infrastructure. It's ludicrous
| and unsustainable.
|
| Eliminating transfer pricing (both IP and non-IP) is a way of
| avoiding this race to the bottom as globally mobile capital
| perpetually moves chasing the lowest tax rates and short-term
| incentives.
| thaumasiotes wrote:
| > But if Apple has $100B (out of $300B), as an example, in
| revenue in the US then the US gets to tax 1/3 of their
| income.
|
| That is already happening.
| CivBase wrote:
| Loopholes like this are why I balk when any politician talks
| about raising corporate taxes. I agree that businesses should pay
| more, but until loopholes like this get plugged I don't believe
| it will do any good. At best it's a way to placate voters without
| accomplishing anything of value. At worst, it can make our
| horrifically complex tax code even more complex, making it even
| easier to hide loopholes.
| tomschlick wrote:
| Its the same thing with the upper tax brackets. People point to
| the 50's and say "look we taxed the rich at a much higher
| rate!!1" but what they miss is that there were so many
| loopholes that the rich didnt pay anywhere near that rate.
|
| Loopholes are the lifeblood of corps / billionaires. No one
| will fix them though because thats where their campaign
| contributions come from.
| bigfudge wrote:
| In the UK at least this isn't actually true. The studies done
| use tax records to estimate effective tax rates, not just
| published tax rates.
| toyg wrote:
| The rich paid more in the '50s, because the alternative (the
| USSR) was worse. Moving money was slow and risky; if you
| parked your cash in a friendly Caribbean island, there were
| no guarantees that tomorrow that island would not see a
| Moscow-backed revolution and your stash would go up in smoke.
|
| Nowadays the world is largely stable. Running conflicts are
| largely ethnic in nature, hence limited to specific areas.
| Capital is welcome everywhere, and you can move money in and
| out of a country with a click. So it makes sense for the rich
| to shop around, like we do when buying insurance through a
| comparison website.
| lmeyerov wrote:
| We are a pretty normal delaware c corp . If optimizing for not
| paying taxes, we'd probably focus on states like Texas, and
| divest from anyone and anything in California, but we haven't.
|
| Bigger than our taxbill is our accountant, lawyer, etc bills, and
| in turn, their jobs get easier with delaware: they know it & it
| doesn't change as much as say California. More than taxes is day
| to day like big multiparty contracts , equity management, and
| more existentially, potential m&a. delaware law isn't federal
| law, but everyone knows it and follows it, so close enough.
|
| it might feel expensive to start and maintain, but probably isn't
| when you look back at your actual costs. in addition, legal
| counsel will pressure you to reincorporate if you don't, which
| would be a double cost. would be my default choice if doing it
| again: only want to innovate in so many things, and unlikely for
| this to be one of the most important areas of the business to be
| extra clever on.
| gamblor956 wrote:
| Also, since the _Wayfair_ decision, pretty much any interstate
| income is taxable where the customer is located if you do
| enough business in that state (usually an income threshold, but
| in many states its a number-of-transactions threshold).
|
| Locating in Delaware literally saves you nothing in paying
| taxes; indeed, it actually costs a tiny bit more, tax-wise,
| than locating in your primary state of business.
|
| But on the note of other compliance expenses: being
| incorporated in Delaware increases your compliance costs.
| You're now subject to suit in Delaware _and_ whatever states
| you actually do business in (including especially whatever
| state your HQ is located in). So, for example, you don 't avoid
| exposure to CA law if you have CA customers (and many state
| consumer protection rights can't be waived by a ToS or by a
| signed contract). And you don't need to be incorporated in
| Delaware to include a jurisdiction clause in your B2B
| contracts.
|
| Delaware is useful in the limited situation that you are a
| corporation with a complicated capital structure that needs a
| management-friendly, shareholder-averse court system.
| tzs wrote:
| > In Delaware, there are 2 huge registered agent firms:
|
| > CT Corporation (1209 Orange Street) is home to 285k+
| businesses, including Walmart, Apple, and Coca-Cola
|
| Apple may be using that firm for something, but Apple is not
| incorporated in Delaware. Their state of incorporation is
| California according to their SEC filings, and has been since at
| least as far back as 1994.
| jagger27 wrote:
| It seems the only mentions of Apple being incorporated in
| Delaware are from news articles and infopieces like TFA, no
| actual documents showing they are.
| ghaff wrote:
| It doesn't seem to be the case. From their last 10-K: "The
| Company is a California corporation established in 1977."
| djcapelis wrote:
| Apple has state based branches registered in many states that
| it does business:
| https://opencorporates.com/companies/us_ca/C0806592/statemen...
|
| These are so irrelevant to the California corporation that
| Apple has argued in court that there's no corporate nexus in
| Delaware and so litigation there is not a valid venue:
| https://finance.yahoo.com/news/judge-single-apple-store-make...
|
| It didn't work, but the ruling was based more around the
| existence of a retail store there than anything else.
| Layke1123 wrote:
| Without even reading, I'm going to assume it had to do with
| capitalists dodging taxes. Let's find out how surprised I'm going
| to be. /s
| koheripbal wrote:
| This is exactly how people reinforce their existing bias.
| mrwnmonm wrote:
| This is exactly how people treat someone being honest. You
| don't know what is his opinion after reading the article, so
| you can't say he reinforced anything.
| techbubble wrote:
| Well, there's also the bit about not having to deal with a long
| list of fees and onerous requirements like many states have,
| when all you're trying to do is start a business, build a
| product and hopefully find some paying customers.
| kingsuper20 wrote:
| To be fair, you have to wonder what the point of corporations
| even paying taxes is. I always thought that they should wait
| until the shareholders or employees actually received
| money/goods/services from the Borg. In a highly simplified
| world, 100% of profits are passed through, but then you
| currently get the issue of dividends being non-deductible
| (that's true, isn't it?). Odd.
|
| On the other hand, with the Senator from Mastercard running
| matters, I don't expect to see any consequential changes.
| ghaff wrote:
| Corporate income tax is double taxation--in theory.
|
| On the other hand, as others note, there are so many ways for
| individuals to defer taxation, for example in the case of 401
| (k)s, or even eliminate it in the form of large charitable
| contributions or other mechanisms. So I'm not _entirely_
| opposed to some level of corporate income tax.
| PeterisP wrote:
| The key issue with that is that in this case the shareholders
| can defer the distribution (and thus the taxation) for
| multiple decades and potentially forever. If you need to get
| some spending money/goods/services from the Borg, you can
| instead sell a small share of the Borg; if you'd want to
| invest the profits somewhere else, you instead have the Borg
| invest it there (because that's untaxed in that case), if
| you'd want to buy a fancy villa you can have the Borg buy it
| and rent it to you - even at a fair price, the key thing is
| that you're only taxed on the amount you'd need to extract
| for rent, but the purchase is with pre-tax money.
|
| If we would wait until the shareholders actually receive the
| money, it means they have the ability to arbitrarily decide
| when the revenue will be taxed, so they'll ensure that it
| definitely isn't taxed now. So the result would be that
| profits are _never_ passed through until /unless absolutely
| necessary - or perhaps they can wait out a couple governments
| until some decades later the rules change.
| kingsuper20 wrote:
| It seems to me that that argument could be made for any
| appreciating asset class.
|
| Real estate (especially in Prop 13 California) would go up
| in value and could be borrowed against. Same with
| collectibles. I hear what you are saying in that the gaming
| on a simplification begins on Day 2.
|
| With tax law, I'd say that the West is covering new ground
| in the last 100 years. Multiple mitts in the pie of
| legislation who all want something different (money,
| partial control of the taxee, veering of social goals)
| resulting in increasingly arcane rule sets, edge conditions
| resulting in tax court decisions with yet more fuzziness on
| the outlines.
|
| The death of self employment and economy of scale of the
| modern corporation leads you to some weird places.
| PeterisP wrote:
| No, the argument is about _revenue generating_ asset
| class, and the thing is is that such a deferred taxation
| enables, and motivates (perhaps even forces) one to
| effectively convert any revenue generating asset class to
| an appreciating asset through a corporate wrapper. And
| the deferral of taxes breaks the process of governance,
| as there 's no income now to pay for the common expenses
| now.
|
| Real estate is a good example - assume _non-appreciating_
| real estate, which is the historically main example of a
| revenue generating asset (i.e. the rentier landlord class
| historically). If you defer taxation of profits until
| they 're removed from the company, then any rent-earning
| landlord can instead of earning rent, getting taxed, and
| investing that after-tax money in more real estate would
| establish a corp for that, and use the rental profits
| (untaxed) to buy more real estate within that
| corporation. It gives a tax advantage (ability to
| arbitrarily defer) to everyone who can put their earnings
| under a corporation, and punishes those who can't.
|
| The key problem with such taxation is essentially the
| same as moving to a consumption-only tax - it means that
| you disproportionally tax the people who (have to) spend
| all their income to buying things for consumption (i.e.
| the poor), and don't tax the people who use their income
| to buy revenue-generating assets and control (i.e.
| capitalists); it's a rich-get-richer, poor-get-poorer
| form of taxation.
| kingsuper20 wrote:
| "rich-get-richer, poor-get-poorer form of taxation."
|
| Is poor-get-richer, rich-get-poorer the purpose of
| taxation? Why?
| ed25519FUUU wrote:
| Wait until you find out how much in taxes the elites pay in
| communist countries.
| kingsuper20 wrote:
| The high GINI scores in the USSR always cracked me up.
|
| The tendency for money and resources (and pretty women I
| suppose) to pool has never been well dealt with. All large-
| scale systems for business and government seem to devolve
| into dogfights over scarcity.
| Layke1123 wrote:
| Whataboutism? Are you saying if they do it, it makes it ok
| for us to do it? What's the difference then?
| pplrlikethis wrote:
| No the point is that PEOPLE will try to take advantage of
| tax codes regardless of the ideology presumably followed by
| the country. It has nothing to do with capitalism. You
| could undoubtedly find examples of elites avoiding taxes
| under feudalism, or in the theocracies of the world, in
| Communist nations, and capitalist ones.
|
| The thing you ascribe to capitalism is a failure not of
| some ideology but a problem with human nature. If you blame
| capitalism and throw up your hands the problem can't be
| addressed.
| kingsuper20 wrote:
| Tax avoidance, and inequality generally, is not a
| distinguishing feature of US-style capitalism.
|
| It appears to be baked into the cake of humanity.
| Grimm1 wrote:
| The 175-180k figure for franchise tax is misleading. Our
| franchise tax as an early pre-revenue company was $450 dollars
| this year because of one of the methods of franchise tax
| calculation available.
| tomklein wrote:
| I guess the author means $175 up to $180,000 instead of $175k
| as minimum
| Grimm1 wrote:
| The minimum to my knowledge is that $450
| LeonM wrote:
| I did YC startup school (twice, actually), and one of the first
| courses was about the legal aspects of setting up your company.
| The talk basically said "just register in Delaware", without
| explaining why.
|
| For me as a European (and many other non-US founders in my SuS
| group) the course material was basically useless. But we did have
| a good discussion afterwards on loopholes, and why they exist in
| such way in the US.
|
| As I understand it, Delaware is what Dublin is to Europe.
| bradleyjg wrote:
| A lot of people getting hooked on the tax part, some on the
| anonymity part, but don't underestimate the friendliness of
| Delaware courts to boards of directors. Things like staggered
| boards, share classes with extraordinary rights, poison pills and
| so on have all easily passed muster in Delaware and might well
| not have in a different state.
| D13Fd wrote:
| The Delaware Court of Chancery is among the best in the world, if
| not the very best, and Delaware's corporation law is extremely
| well developed, far ahead of most other states.
|
| When they teach corporation law in law school, they usually teach
| Delaware law. It's the most advanced in the country.
| kahirsch wrote:
| Could you be a little more specific about what you mean by
| "best" and "most advanced"?
| [deleted]
| gamblor956 wrote:
| It's neither the best, nor the most advanced. It has two
| centuries of law pretty much focused on upholding management
| at the expense of all other parties' interests (including
| non-management shareholders).
|
| Today, most new companies form as LLCs, which are regarded as
| the "most advanced" form of business entity for legal and tax
| purposes. In that regard, Wyoming is generally considered to
| have the "most advanced" law because many governing LLC
| concepts and regulations originate there first.
| [deleted]
| rzzzt wrote:
| Is there some advantage of choosing the entity mentioned in the
| article over its ~100 competitors? I found a list of registered
| agents here: https://corp.delaware.gov/agents/
| arjawn wrote:
| Are you forming a C Corp or an LLC? You'll need a registered
| agent regardless BUT you shouldn't pay too much for a
| registered agent!
| rzzzt wrote:
| Neither, just found it interesting that the _one_ address
| always comes up, but you don't hear of the runner-ups
| (although it seems I have also missed the mention of the
| other big player that someone quoted from the article).
| brianwawok wrote:
| Curious how much it cost.
|
| My random Indiana registered agent is $50 a year. I'm sure
| I could somehow find a cheaper one, but not worth the
| effort.
|
| Maybe this is a similar situation but in Delaware, which
| has a LOT more businesses than Indiana.
| kube-system wrote:
| I am sure that the quality and breadth of services provided by
| the agents chosen by fortune 500s well exceed the services
| provided by an agent that is one guy in a garage.
| [deleted]
| jpincheira wrote:
| It's a state that has services very well streamlined, and it's
| perfect for C-Corps. For LLCs, probably the best state will be
| Wyoming.
|
| We recently launched our new company [1] and are deep into
| helping entrepreneurs getting started mostly in Delaware and
| Wyoming.
|
| [1] https://startpack.io
| vageli wrote:
| What makes Wyoming the best state for LLCs?
| jpincheira wrote:
| From our experience, most customers go for Wyoming LLCs
| because of the cost-effective option of a $50 Annual filing
| charge as compared to Delaware which has a $300 Annual
| franchise tax. The option is totally up to you.
|
| We wrote a guide around how to choose the best state for new
| LLCs [1]
|
| [1] https://www.startpack.io/best-state-to-form-your-llc-in
| itake wrote:
| My understanding is that if you create your LLC out-of-
| state, you still need to register your llc as a foreign
| entity, which often, puts forth the same requirements as an
| in-state LLC.
|
| Take specifically California. If you live and operate in
| CA, but register your LLC in Delaware (or Wyoming), you
| still need to pay the $800/yr franchise tax and complete
| all of the same tax paperworks that you would if the LLC
| was registered in CA.
|
| Isn't it just simpler (and cheaper in time and money) to
| register in the state you operate in?
| arjawn wrote:
| If you live in the US, correct! It's best to form an LLC
| in the state you live in.
|
| If you live internationally, you can actually choose any
| state to form an LLC in (and Wyoming + Delaware tend to
| be the two most popular options, Wyoming for online
| digital businesses due to the lower ongoing annual costs
| = $50 per year to the state vs $300 per year in
| Delaware!)
| vageli wrote:
| Just a friendly heads up, there are a few copy issues on
| that page, like
|
| > AsLLCs are overseen at a state level. Any LLC that has
| been registered in that state, and conducts business there,
| is called a Domestic LLC.
| itake wrote:
| Members nor Managers are not listed with the state
|
| My main issue with out-of-state LLCs though is you typically
| have to file in whatever state you're operating/living in as
| a foreign LLC, so you end up with double the paperwork and
| filing requirements.
|
| IMHO its better, especially for sole-proprietor / pass-
| through LLCs to just register in whatever state you're living
| in.
| arjawn wrote:
| 100% not worth the headache so better to file in the state
| you "do business in" = home state!
|
| But as an international resident world is your oyster and
| you can choose any state :)
| IncRnd wrote:
| > 100% not worth the headache so better to file in the
| state you "do business in" = home state!
|
| This is only true until someone attempts to sue for a
| triviality. Most companies get sued at some point in
| time. This is why such a service is of value.
| arjawn wrote:
| Ah if you are getting sued most formation services won't
| provide / cant provide "official legal counsel" so you
| will need a lawyer for that
| IncRnd wrote:
| Correct! I was referring to the disclosures of corporate
| officers not made by Delaware.
| ilovepitchdecks wrote:
| There's no no need to use a formation service. Incorporating a
| company in the US is very easy and can be done online, even by
| foreigners. All you need is a Registered Agent and they start
| at $25/year (in Wyoming).
|
| I'd also like to point out that forming a LLC as a foreigner is
| a bad idea, as that might make you personally liable for US
| taxes. Either form a C Corp outright or have your LLC taxed as
| a C Corp. Then just zero out the profits. Some extra forms to
| fill out, but still better than paying taxes.
| igammarays wrote:
| How does one zero out the profits? Pay yourself as a
| contractor?
| ilovepitchdecks wrote:
| Exactly. If you're outside the US, you can only be a
| contractor, even if you work full-time for your company.
| There are no caps on how high a contractor's fee can be -
| that's not the case with employee salaries.
|
| There are more fancy options, such as having a second,
| foreign company owned by you be the contractor - if you
| want to avoid personal income taxes in whatever country you
| live in. Beware of CFC regulations though.
|
| For US founders, S Corps are better.
| jdhn wrote:
| Why would you go to Wyoming, and not Nevada?
| arjawn wrote:
| For international LLC owners, Wyoming has lower ongoing
| annual fees! $50/yr in Wyoming vs $350/yr in Wyoming!
|
| Also I call out international above because if you are a US
| resident you should form an LLC in your "home state" aka the
| state you do business in!
| notriskfree wrote:
| Because so many large American corporations; are heavily involved
| with Farming chickens.
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