Delaware Holding Company: Everything You Need to Know
A Delaware holding company allows you to do business anywhere in the world and is taxed according to Delaware laws.3 min read
A Delaware holding company allows you to do business anywhere in the world and is taxed according to Delaware laws.
A non-US company can choose a Delaware holding company for many reasons, including the following:
- The U.S. continues to be the main place for venture capital and other private financing.
- Some of the main stock markets remain located in the United States and an IPO (initial public offering) and stock listing on the NASDAQ or NYSE can be a potential capital injection.
- A U.S. buyer of a trade is seen as a possible exit and reincorporation in the U.S. helps improve the sale.
- U.S. company sales of products to other companies are simpler than those by non-U.S. companies.
Running a business through a U.S. holding company achieves these objectives. An increasing number of non-U.S. companies choose to form a Delaware holding company structure in connection with venture capital, private equity, or other financing.
What Is Needed To Form a Delaware Holding Company?
Creating a Delaware holding company is a major decision which requires substantial investment of shareholder time and management, along with tax, accounting, and legal professionals.
As the business matures with age, the capital structure and commercial relationships can become complicated. The business management team can consider if a flip makes sense for the company in the early times of financing. This flip can help to provide new financing and shareholder value.
Starting an LLC Holding Company in Delaware
A business that starts in Delaware can do business anywhere in the world. Usually, people choose a Series LLC because there is only one accounting line and tax spending in Delaware. However, many choose to form other LLCs as this new business model is still new. People start a holding company in Delaware and then other LLCs under this holding company.
Many choose to start a DBA for different businesses under the LLC. The process of forming a DBA is by registering a name to describe the different businesses you do and the products you're selling. But this process doesn't have a legal separation for different businesses. If something goes wrong with one LLC, then the other LLCs are also to blame.
Lawyers and professionals in the world advice to choose an LLC for each service or product you're offering. This way, you can protect your debts, assets, and liability in case something goes wrong. It's recommended to follow a hierarchical plan so you can describe the relationships between LLCs. It's a good idea to separate your assets from your business.
What's the Problem With a Delaware Holding Company?
Some people in Pennsylvania have heard that the time of tax advantages in Delaware may be ending. Many politicians have called to end the loophole that Delaware offers businesses, including proposals to return funds previously held for a Delaware Holding Company or similar business structure.
The seemingly bipartisan support should make taxpayers and practitioners pay close attention because this kind of change will affect them. The proposal is targeted to produce $1 billion in taxes over the next ten years.
- The corporate net income tax is targeted to be from 9.99% to 6.99% over a certain period. This tax reduction is estimated to cost around $700 million.
- The remaining $300 million of tax revenue from the loophole is targeted for the uncapping of the operating loss over the ten year period.
- Controversy will develop as to how to spend the tax revenues from the loophole. Different groups have various opinions on this.
- What everyone can agree on is that there has not been previous bipartisan support for the loophole, and therefore practitioners and taxpayers should keep an eye out for what happens.
Disadvantages of a Delaware Holding Company
A Delaware holding company also offers possible disadvantages including:
- The tax implications are complex and require detailed study. If you fail to comply with the rules, it could result in losses of tax benefits or other adverse effects.
- The Delaware company will become exposed to litigation in the U.S. because it was formed within the U.S.
- If the company wants to list in a non-U.S. stock exchange, the Delaware holding company structure will complicate legalities there. The company is subject to the U.S. securities laws and can issue securities if they are registered.
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