Have you been told that your US branch HAS to be incorporated in Delaware to take advantage of the management friendly laws, or that you NEED to incorporate in Nevada or Wyoming to escape state income taxes? Do you need to choose your State of Incorporation?
Have you run across services boasting of the advantages of incorporating in a specific state and offering incorporation for a flat fee? We’ve seen a handful of Kiwi businesses that have followed this sort of advice, but don’t seem to be experiencing the promised tax or legal advantages after they actually start doing business in the US. While tax and jurisprudential advantages should be considered when making a determination of which state to incorporate in for your new business in the U.S., there are certain simple realities that come into play:
1. GENERALLY, YOU SHOULD INCORPORATE IN THE STATE WHERE MOST OF YOUR BUSINESS IS CONDUCTED.
For Kiwi businesses, your State of Incorporation is usually California. If you mostly do business in California, then don’t waste your time incorporating in another state. No matter what is promised, if your business makes sales inside California or otherwise conducts business in California, then it is subject to California registration and franchise taxes.
The assumed advantage of incorporating in Nevada, Wyoming, Missouri, or some other state that has lower or no franchise/income taxes does not get your business around the reality that if it earns money in California from California sales or transactions, it has to pay California income taxes. This is the same for other states as well. If you are being told differently, you are not being given good advice.
While sometimes there are reasons for incorporating in multiple states, those reasons must fit the legal reality. For example, if you can structure your business so that the transfer of goods is from a warehouse in Nevada to another state where your customers are, then it would be a wise decision to incorporate in Nevada. However, a careful analysis of your business plan from a legal perspective should be undertaken before you make your incorporation decision.
2. COMPLICATED TAX ARRANGEMENTS MAY END UP COSTING MORE MONEY THAN THEY SAVE.
Tax arrangements such as offshore employee leasing contracts and complex IP leasing agreements which purport to reduce your tax exposure to US federal tax or to state tax systems should be entered into only after very careful consideration and independent legal advice. The IRS has issued warnings that it considers offshore leasing arrangements as tax avoidance under many circumstances.
Further, the simple use of a state as a tax base does not get around many other state income tax issues if you do not principally conduct business in your State of Incorporation. Finally, the costs of compliance with such schemes are often more than the expected savings. First of all, to incorporate in a state, your business must have a physical address, a working telephone number, and must have a registered agent for service of process. While there are services you can pay to act as a virtual office for you, these services can cost hundreds or thousands of dollars a year to maintain.
While many Fortune 500 companies do incorporate in Nevada or Delaware, the benefits they are able to take advantage of are because of the scale of their operations and do not transfer down to a small to medium sized business. Do not be scammed into a quick incorporation in a state where you do not have any legitimate legal interest.
3. PERSONAL ASSET PROTECTION MAY BE LOST.
If you are taking your business to the United States and plan on running it from the US personally, or having one of the shareholders or LLC members run the business from the US, you want to make sure that you or your fellow shareholder/member’s personal assets are protected. This also is a matter of concern if you are setting up your US business as a corporate subsidiary of your New Zealand business. You want to make sure that liability from the US business cannot be assigned to the parent corporation.
In order to maintain the corporate shield, you must ensure that your business is incorporated, or at the very least registered in every state in which your business is conducting business. Don’t be fooled: You Need Legal Advice when Choosing your State of Incorporation.
-Zachary D. Norris, JD, LL.M and Ada Echetebu, JD, LL.M.
*This article is for general informational purposes only and does not constitute legal advice, nor should it be construed as constituting any legal advice from Norris Echetebu Law, The Norris Law Firm or any of its affiliated lawyers. For specific analysis of your US legal issues, please contact the attorneys at Norris Echetebu Law at +64 (0)9-889-2602 or visit us on the web at http://nz-uslegal.co.nz/