Delaware is one of the go-to jurisdictions for many foreigners wishing to incorporate. This is due to several factors from which we mention a critical one: its tax regime.

Delaware is a “tax haven” state and therefore is a hub of thousands of companies.

As a foreigner, you get to choose between incorporating a Limited Liability Company (LLC) and a C-Corporation (Corp).

To avoid repeating the information mentioned in our last article, we will provide you with a brief of an LLC tax regime in case of foreigners and dive into the tax regime in case of a Corp.

The ideal situation for foreigners is when they are not resident in the US, and they don’t have any connected income. Therefore, they won’t have to pay any taxes on their LLC.

The main difference between a Corp and LLC is that the latter is considered as a pass-through entity. Therefore, shareholders will have to pay personal income tax, so if they don’t live in the US or don’t receive any income connected to the US, they won’t have to pay any taxes. The situation is different for Corps since it is considered an entity separated from its shareholders when paying tax. It shall always pay a federal tax of 21% even if it does not conduct any business in the US.

There is no state tax in Delaware, and the state does not impose a withholding tax on dividends.

So, Corps will always have to pay a 21% federal tax.

Here, an important question arises :

Why would foreigners consider incorporating a Corp and pay 21% tax when they can incorporate an LLC and pay no taxes in the US?

At first glance, it sounds crazy not to go for an LLC and save all the money that could go to taxes, but if you dig in deeper, you will find the following:

  • The business structure of a Corp is advised when thinking of getting investors. Investors most often request a Corp in Delaware. Unlike an LLC, a Corp has different shares, the common shares, and the preferred shares. Investors usually request the preferred shares in return for their contribution to the company.
  • Sometimes paying the 21% tax is more advantageous than not paying any in Delaware but paying in your residence country. For the avoidance of doubt, LLC owners have to pay income tax in the countries they reside in. Therefore, in the scenario where this foreigner is living in an EU country that imposes high-income tax rates, the 21% federal tax is more beneficial. As a result, such residents will prefer to pay this percentage that is far less than they would have to pay in personal income tax.

There are also many cases in which having a Corp would be a better fit.

The bottom line here is that you should always look into what your company needs first and then find the best legal structure and tax regime possible. So it’s a process. You should never look just for one but examine it as a whole.