Startup Legal Talks (3)
Are the so-called "tax-free states" really tax-free? In the 50 states of the United States, why has Delaware become a "sweet pastry"? What taxes are exempted from tax-exempt states? In which state is registration tax exempt? In which state is a company taxed?
More dry stuff, less wordy, and welcome to startup law. Everyone knows that startups are registered in Delaware, but most people don't know why. Some people may say that Delaware is a tax-free state, right? But that's not the case at all. Spoiler first, today's results may surprise you, most articles on the Internet do not mention this, and this is the truth that only lawyers will tell you.
1. What tax is exempted in Delaware?
Let's look at a few charts together.
The first is the distribution map of corporate income tax in the 50 states of the United States. See here how much the Delaware tax rate is 8.7%
Second, the individual income tax distribution map of the 50 states in the United States, here is how much the Delaware tax rate is 6.6%
Seeing this, the audience may be wondering, why is there no tax exemption?
Finally, let's take a look at the consumption tax of the 50 states in the United States. Here we see that the tax rate in Delaware is 0.
Do so many companies go to Delaware to register for this excise tax exemption? Obviously not.
What is this sales tax? Everyone should know that when you buy something in an American supermarket, you see 10 yuan on the shelf, and when it comes to the checkout, it will cost you about 11 yuan, right. This extra part is actually the so-called consumption tax. That is to say, the consumption tax exempted in Delaware is only applicable to the daily shopping discounts for people living in Delaware. It sounds like we have nothing to do with the technology companies that want to raise funds and go public.
So why register in Delaware? It's actually because of Delaware corporate law. Delaware is a small spot on the map. Birds don’t lay eggs, and 25% of the state’s gross domestic product is derived from one specialty—corporate law. Delaware's corporate law is the most comprehensive, most advanced, and most suitable for companies from establishment to financing to mergers or listings in the United States. Everyone knows that the United States uses case law, and Delaware also has the most complete case law in corporate law. It is the supreme honor of being a judge of the Delaware corporate law trial court and a corporate law judge. All lawyers specializing in corporate law must have a local state code on their bookshelf, and the other is the Delaware corporate code. This also leads to the fact that more than 99% of listed companies in the United States are registered in Delaware. If your startup company is not registered in Delaware, then investors will definitely ask you to transfer the company's registration location. to Delaware.
2. Are tax-free states really useful?
So, don't say that Delaware is a tax-free state in the future. It is useless to avoid this consumption tax, because the tax-free state everyone wants is obviously to want it to be exempt from income tax, whether it is corporate income tax or personal income tax. Taking a step back, even if Delaware is exempt from corporate income tax and personal income tax, it is not something that startup companies need to consider. As long as people who have entrepreneurial experience, startup companies are burning money, not making money. If there is no profit, then there is no need to consider the issue of corporate income tax at all.
3. Which state should the company pay tax according to?
If some entrepreneurs say that although the start-up company burns money at the beginning, if it grows up and starts to generate income, then it is necessary to consider the issue of income tax. At this time, is it necessary to register in a tax-free state?
The answer is still No!
The reason is that the company's income tax has nothing to do with the state of registration!
It's nonsense if someone tricks you into registering in those tax-free states like Washington, Nevada, Wyoming, South Dakota, Texas, etc.
So if the corporate income tax has nothing to do with the state of registration, which state should it be in? In the next issue, we will calculate the accounts, and let's talk about which state the company's income tax should be calculated according to.
More dry goods, less wordy, here is the law of startups, see you in the next issue.
