Alexander John Hay PLLC

Blog

“How Delaware Thrives as a Corporate Tax Haven”

“How Delaware Thrives as a Corporate Tax Haven”

An interesting, if typically biased, article about Delaware companies.

I often say that the USA is the greatest tax haven on earth, only you cannot be a US citizen or live here. This is because US laws provide a tremendous degree of legal protection and tax benefits for foreigners who are non-residents. To a lesser degree Delaware does this for the rest of us.

This article describes how Delaware provides an ideal jurisdiction for business formation, but of course throws in the rather unfair characterization that it is all somehow unfair, perhaps even criminal in nature. The article emphasizes the fact that Delaware company formation provides a tremendous degree of privacy, making it very difficult to determine who is the real owner of a Delaware company. The article points out that many criminals have chosen Delaware, arguably because of its privacy. But this characterization is grossly unfair. The privacy that can be obtained by using states likes Delaware is only a small part of why Delaware is such a popular jurisdiction. The fact that a few bad eggs take advantage of this privacy does not make it a bad thing.

The article focuses on tax policy, but implies that somehow the privacy that is obtained by using a Delaware company is the issue. This is simply not true. Privacy and Tax Reduction are two very different things.

There are many valid reasons to choose to incorporate in Delaware. The primary reason why Delaware is so popular is because Delaware has chosen to be a low tax jurisdiction thus attracting businesses. It is also popular because its corporate law is so advanced and secure. Finally, Delaware is very popular because it provides a great haven for legal asset protection planning and it provides financial privacy.

None of these reasons are bad; least of all the financial privacy provided. I am confident that more honest people benefit from such privacy than there are criminals that take advantage of it. If such privacy was taken away, criminals would simply use false names and/or sham owners; after all they are criminals. The privacy provided by Delaware and other states protects the honest who are trying to protect their assets and personal privacy more than it covers for criminal activities. Perhaps the other states should stop complaining about Delaware “robbing them of tax revenue” and instead emulate Delaware and other low tax, business friendly jurisdictions.

July 2, 2012
How the USA can provide you financial privacy

Do you want Financial Privacy?

Many people are surprised to find out that the USA actually provides better financial privacy than most other developed countries, and even better than most “tax havens”.

It is my considered opinion that some of the best banking privacy in the world is now found in the United States of America. As long as you are not “laundering money” (the vague definition does cover a lot of ground) or supporting national security threats, the US provides some of the most strictly ENFORCED privacy rules around. Notice my emphasis on the word ENFORCED.

There are many jurisdictions that have such amazingly draconian bank privacy laws that you wonder why anyone would ever take the risk of becoming a banker in those countries. I am thinking of one small country where even a minor disclosure released through mistake can result in jail time and fines for the banker, at least under the terms of its laws. Wow! That must mean that your money and your information is safe! Well let us look at how often these laws are enforced. After all no one is perfect. In the country I am thinking of there has never been, to my knowledge, a single banker prosecuted under the draconian bank privacy laws. Not even a slap-on-the-wrist or a probated sentence. Either bankers in that country never make mistakes, or the laws are never enforced. What good are bank privacy laws that are not enforced?

In the USA on the other hand bank privacy laws are enforced (to the chagrin of most of my banker friends) by a bevy of alphabet soup Federal, State and Local agencies whose only reason to exist is to enforce various consumer protection laws, banking disclosure rules and credit protection regulations. In addition to all the government agencies looking to enforce these rules (and levy punitive fines that go to fund their activities), the laws themselves almost always give the victim the right to sue the bank in civil court with punitive damages and attorney’s fees awarded. I know a lawyer who specializes in class-action law suits against banks who violate these consumer protection rules.

In addition most states have enacted Deceptive Trade Practices Acts which provide treble damages plus attorney’s fees to the victim of any Deceptive Act, disclosure of prohibited information being among them.

Because of these consumer protection laws combined with vigorous government enforcement along with civil court remedies for victims, US Banking has become some of the most private in the world in spite of the rather sinister reputation of the Patriot Act.

If you would like more information on how best to take advantage of the USA contact me.

July 1, 2012
What is an LLC? Why should you care?
A limited liability company (LLC) is a hybrid business entity that blends together characteristics of a partnership and a corporate structures. It is incredibly flexible giving limited liability to its Members (the owners) just like a corporation, but offering the ease of management of a partnership.

It also can offer interesting tax advantages depending upon how you want to use it (but only if properly set-up). It can be set up to be treated as a “disregarded entity” providing “pass through” tax treatment, or it can be set up as a “taxable association” in which case it is taxed like a corporation, but without some of the negative aspects of a corporation. This can often avoid double taxation.

But the most interesting aspect of an LLC is its ability to protect your assets. How can an LLC protect your assets?

The LLC has many special features similar to a partnership that are very beneficial for asset protection:
- A partial LLC interest, unlike shares in a corporation, cannot be easily seized by creditors. If a Creditor attempts to take your Membership Interest, the creditor will only receive an “assignment” of the interest. The creditor can take away your membership interest, but will not be able to vote in the absence of the unanimous approval of all the other Members.
- An LLC can require Members to make additional contributions of capital. So if a creditor takes away your Membership Interest, the LLC may require the Creditor to make additional contributions to the LLC. If the Creditor refuses, he may lose his interest in the LLC.
- If the LLC shows a profit, it is not necessary for the profit to be distributed to the Members but can be retained by the LLC. However, the Members will be taxed on this profit even though they did not receive it. So if a Creditor takes your Membership Interest, the LLC can operate at a profit, and may be able to force the Creditor to pay taxes on profits which the Creditor never received.
A creditor who attempts to take your shares in the LLC will only get an assignment of non-voting shares. The remaining shares will be held by the other members who may be friends, family, or even specially designed trust that will protect your interests. These other Members will be able to vote on who becomes Manager of the LLC, not the creditor that took an assignment of interest.

The other members may choose to appoint you or another friendly person to be the Manager of the LLC. As Manager of the LLC you will be able to decide whether or not you and other employees get a salary, whether or not assets are sold, whether or not profits are distributed, whether or not there is a need for additional contributions from the Members, etc.

In essence, a Creditor who takes your shares in a cleverly designed LLC will not be able to vote or control the company, will not be able to force distribution of assets or profits, may have to pay taxes on income earned by the company even though it never received the profits, and will be vulnerable to demands for additional capital.

As you can see this would be a very unpleasant situation to be in if you were a creditor, but a very good situation to be in if you are trying to protect your assets. Few creditors will want your membership interest in the LLC when they realize what a hornets nest they are getting themselves into.

I have designed a specific system to be able to take advantage of these attributes of an LLC. I call it The Personal Preservation Fortress®. Check it out if you would like to get more information on how to effectively and affordably protect your assets.
June 29, 2012