Delaware: how and why to open a gaming company in this state?

The material was prepared by Daniel Boreisho, a junior lawyer at Versus.legal.

Daniel Boreisho

We have chosen the state of Delaware as the topic of this article. One of the smallest in area among all the United States, but one of the most (if not the most) popular state for doing business. How did it happen that the largest US corporations are registered in a small state on the north of the East Coast of the USA, even if they work in others?

It’s simple – the laws of the state contain the most attractive business conditions for enterprises organized on its territory. Boris Kalmykov, CEO of Hypemasters, will help us understand the specifics of registering a company in Delaware.

And traditionally, before we start, sign up for our free webinar on foreign incorporation for IT and gamedev. During the event, we will consider the specifics of working in different jurisdictions together with experts, and also present our guide to foreign incorporation.

Why Delaware is a good place to relocate a business:

• the liberal regime of regulation of corporate relations – the Delaware Corporate Code — does not contain strict requirements for the figure of the director, secretary and corporate governance structure;
• the state of Delaware embodies all the advantages of the American legal system: predictability of judicial practice, maximum contractual freedom, flexibility, respect and protection of private interests;
• the state of Delaware is also beneficial from a tax point of view: regulation makes it possible to effectively hide the beneficiaries of corporations, and also has a favorable tax regime;
• Delaware is one of the few states where the so—called Chancery Court still exists, which hears disputes on the “right of justice”. Corporate cases are conducted without the participation of a jury and are distinguished by the highest quality of justice;
• Delaware is not included in the black lists of offshore companies;
• It is very simple and relatively inexpensive to register a company in Delaware, including remotely.

It is important to consider:

• registration of a company is necessarily carried out through a registration agent – a special person registered in the Delaware registry who is authorized to participate in the incorporation process of any company. The registration agent will be a representative of the company and after its registration – he will receive correspondence and interact with government agencies;
• The United States has high requirements for compliance with the rules on confirming the source of funds. The account opening procedure itself can be lengthy if the company has not previously opened an account in the USA. Not all banks agree to open them remotely and require the personal presence of beneficiaries, which can create difficulties in the situation of restrictions on the issuance of visas by the United States.

Many people decide to open a business in Delaware for the first time with the registration of a Limited liability company (LLC) – in some way an analogue of a domestic limited liability company, but combining the features of a partnership and a corporation. The opening of a legal entity in this form, although it differs in an extremely simple procedure, still allows you to fully take advantage of all the advantages of the American jurisdiction for doing business.

Another popular form of doing business is C-Corp, which already looks more like a “classic” legal entity in our understanding.

Differences between LLC and C-Corp

Taxes

LLC does not have to pay income tax and is not an independent subject of taxation – LLC members pay taxes on profits received by LLC.

C-Corp, on the contrary, is an independent taxpayer – it must pay income tax, and participants will pay taxes on dividends received from C-Corp.

Management

LLC members can independently manage the company (or appoint a director on their own), and document management responsibilities are minimal.

In turn, in C-Corp, it is necessary to keep a register of shareholders, hold meetings of the board of directors (which also needs to be formed) and general meetings of shareholders.

Stocks

Shareholders of C-Corp, as a general rule, can freely dispose of the company’s shares belonging to them.

LLC members can do this only with the consent of other members.

Investment

C-Corp is more profitable for attracting investments – there is no fear that C-Corp shareholders will need to pay taxes on investments received by the company, as in the case of LLC.

Terms of existence

C-Corp, as a general rule, is formed for an indefinite period and will not cease to exist if all the founders of the company cease to exist.

LLC, in turn, may cease to exist if all members of the company cease to exist.

Opening a company in Delaware

The company registration period in Delaware is from 2 days to 4 weeks. Such a spread is associated with the possible loading of registration authorities. However, registration rarely takes more than 7 days.

The specifics of the registration process lies in the fact that, as we have already noted a little above, but here we repeat, it is carried out through a registration agent – a special private person authorized by the State of Delaware to advise and conduct the company registration process on behalf of the incorporated person.

The procedure itself looks like this:

Step 1. Decide on the candidate of the registration agent. On the official website of the State of Delaware, you can find a register of registration agents and choose who will interact with government agencies on your behalf.

Step 2. Check that the company name you have chosen is unique and not similar to other brand names. You can also reserve your brand name for 120 days to ensure that it will remain free until the completion of your registration process (here). This is not necessary, but it is still highly desirable.

Step 3. Prepare a package of documents. To do this, you need to fill out a Certificate of formation (Application for Company registration), in which you should specify the name of the company, the name of the registration agent, his address and the address of the registered company.

Step 4. Pay the state fee for the creation of an LLC in the amount of $90. If you register with-Corp, the amount of the fee will depend on the number of founders – at least $89.

Step 5. Upload the completed Certificate of formation via a special service for electronic document download (here).

The average cost of consultants during the creation will be from $700 for an LLC.

At the same time, an LLC does not have to be registered as a separate taxpayer and payer of fees. However, if there are more than two founders in the company, it is planned to open a bank account or it is planned to hire employees, then it is necessary to obtain the employer’s tax number (EIN).

Opening a bank account

As a general rule, a personal presence is required to open a bank account, but in some banks the procedure can be performed online – for example, in United Bank, Western Alliance Bank, Mercury Bank or TD Bank.

It should be borne in mind that US banks have high requirements for compliance with the rules on confirming the source of funds. The account opening procedure itself can be lengthy if the company has not opened an account in the USA.

The required set of documents differs depending on the bank. However, you will most likely need to provide:

• Certificate of Incorporation;
• Employer’s Tax Number (EIN);
• The operating agreement between the LLC participants, which will specify who is authorized to act on behalf of the LLC / The Charter and the Founding Agreement with-Sogr;
• Application in the form approved by the bank.

Maintenance of the company after opening

The LLC must pay an annual fee of $300. The company pays this fee only for the fact of its registration in the territory of Delaware. In fact, this may be the only tax that the LLC pays directly.

C-Corp does not pay such a contribution, but is an independent taxpayer (see below).

The specifics of Delaware is a closed registry. Only the registration agent has information about who is a member of the company. This information is disclosed only in court and provided that the interest in such disclosure is proved.

The confidentiality of ownership can be strengthened even more – the use of Anglo-Saxon legal structures (in particular, a trust) allows you to build effective control over nominal participants (which will be reflected in the register), while leaving the beneficiaries completely confidential.

Delaware corporate regulation in the case of LLC is also liberal with respect to “corporate formalities”. Although annual general meetings are mandatory, they can be held remotely. The legislation of Delaware does not require a mandatory audit.

LLC may not appoint a director, then the company is managed by one of its participants.

Most of the formalities can be handled by the registration agent. He can keep the accounts of the company, as well as perform the functions of the secretary of the LLC. At the same time, the costs for this are included in the annual payments to the registration agent.

But with C-Corp, you will have to comply with more formal requirements of the law. First, it will be necessary to form a board of directors. Secondly, appoint a secretary. Thirdly, it is necessary to hold annual meetings of shareholders and meetings of the board of directors.

The company does not need to open a real office – a virtual one is enough. All correspondence will go through the registration agent, who will be able to send it wherever it is necessary.

However, if you want to open a real office, then the cost of a room of 25 sq.m. will be from $ 7,000 per year.

In practice, the maintenance of the company, excluding office rent, will cost from $3,100 per year for an LLC.

Taxation of LLC

The specifics of an LLC is that it is not a payer of income tax. Instead, the LLC’s income tax is paid by the participants if they are US tax residents.

Participants pay federal income tax at a progressive rate from 0 to 37% if they are residents, as well as state tax on a progressive scale – from 2.2% to 6.6%.

If the LLC participants are not residents, the company withholds a tax of 30% on the dividends paid to the participants. This percentage can be reduced due to interstate agreements, of which the United States has more than 60.

Taxation of C-Corp

As mentioned above, unlike LLC, C-Corp is an independent taxpayer, the company pays income tax. The income tax is 8.7%.

However, if the company has no property and does not operate in the United States, the tax rate is 0%. In this case, C-Corp does not need to file a declaration with Delaware Corporate Income Tax.

It should also take into account the tax on monopoly rights and privileges, which is 1% of the authorized capital and is paid if there are resident employees of the state.

Like LLC, C-Corp does not pay capital gains tax.

If the shareholders of C-Corp are residents of the United States (and Delaware), then they pay tax on income from the distributed profits of C-Corp according to the same rules as the participants of the LLC.
A company (both LLC and C-Corp) can pay a regional property tax. Its size depends on the specific district in which the property is located, and averages 0.56% of its market value.

Excise taxes are also quite high in the USA. For example, you will pay ¢23 for a gallon of gasoline, $1.60 for a pack of cigarettes, and $3.75 for a gallon of alcohol.

One of the advantages of the USA is that there is no most important indirect tax, VAT. The regulation of the state also does not provide for its payment.

Hiring employees

In the state of Delaware, there are no restrictions on hiring foreign personnel and there is no advantage of citizens of the country when choosing an employee. This means that it is quite simple to transfer business there. It is important to take into account the need to obtain work visas.

The employer pays social contributions of 15.3% from employees’ salaries, which include contributions:

• for social insurance – 12.40%;
• for medical insurance – 2.90%.

The working week is 40 hours, as in Russia. However, there is less vacation here – only 14 days.

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This was the basic information about opening a company in Delaware. You can learn more at our free webinar, which will be held on May 20 at 19:00. Don’t forget to register to receive the full version of the guide to foreign incorporation after the event.

And pay attention to our previous materials about opening a company in Cyprus, protecting your game from cloning, the legal features of developing children’s games and the nuances of launching games in China.