          
          
          
                          TAX SAVINGS IN DELAWARE
          
          
               Once you're operating your small business, you
          should seriously consider the advantages of
          incorporating in Delaware.  Delaware is one of several
          states that have no corporate income tax.  Over half of
          the Fortune 500 companies are incorporated in Delaware,
          but it works just as well for the small business. 
               For many companies, the most important reason to
          incorporate in Delaware is that there is no state
          income tax.  If you live in a high-tax state this can
          be crucial.  In California, for example, corporations
          pay a minimum of $9,600 on every $100,000 of taxable
          income.
          
          Tax avoidance
          
               If minimizing taxes is your concern, your strategy
          should be to form a Delaware corporation and arrange
          for the profits to accumulate there rather than in the
          high tax state in which you presently do business. 
               This is easier than you may think.  Suppose you
          run a small company and have some major element of the
          business that can be handled from Delaware.  Or a
          service that can be contracted for through the Delaware
          corporation.  If you do this with a service, it is
          important that the entire service is not performed in
          the high-tax state, in which case the Delaware
          corporation is subject to the same taxes in that state
          as any local corporation.  But your sales
          representative travels a 10 state area, so you make the
          Delaware corporation your distributor for those 10
          states, and pay his salary out of the Delaware
          corporation.  His official base is now Delaware.  You
          pay your Delaware corporation a sufficient commission
          to keep most of the profits in Delaware instead of in
          the state where your business is physically
          headquartered. 
               Or you could contract for sales management
          services from the Delaware corporation, paying it a
          fixed fee, and it pays your salesman.  Next, you tell
          your salesman that he is being transferred to a new
          employer.  He still gets the same salary, and he still
          does the same job at the same pay.  The only difference
          to him is that his paycheck comes from a different
          issuer. 
               Your fee to the Delaware sales management company
          might be $75,000.  Suppose that you are paying the
          Delaware corporation an extra $47,000 in management
          fees over what your salesman was previously paid, so
          your net profit is zero. 
               Oddly enough, that's good news.  Zero profit means
          zero corporate income tax in your high-tax
          jurisdiction.  Now you have $47,000 of profit at zero
          taxes in your Delaware corporation. 
               Best of all, it's perfectly legal.  All you have
          to do is make certain that the accounting and
          management of the sales company are actually being done
          through the Delaware corporation, and that all sales
          are booked and invoiced accordingly. 
               This general method of transferring income and
          profit from high-tax jurisdictions to low-tax
          jurisdictions is common.  It will work for just about
          any goods or services your business requires, other
          than those of a purely local nature. 
               Note that a Delaware corporation will help reduce
          only your state taxes.  Federal taxes apply in all
          states.  However, you could create a third company in a
          tax-free jurisdiction outside the United States.  Then
          you could potentially escape federal taxes as well. 
          (But before doing that, it is important to get good
          accounting advice, so that you don't have an argument
          with the IRS over "transfer pricing.")
               The tax savings afforded by a Delaware corporation
          make it a tool worth considering -- even if you have
          never incorporated before.  The most common pitfall in
          using a Delaware corporation in the ways we have
          described is the temptation to cut corners.  It is not
          enough merely to pretend to do business in Delaware. 
               You run the risk of losing all your benefits if
          the books aren't in order, or if the board doesn't meet
          regularly to approve whatever the company is doing, or
          if the minutes of those board meetings are not up-to-
          date, or any other legal technicality has not been
          properly attended to and officially documented.  But if
          yours is a carefully and prudently run business, you
          can be assured that all the advantages we have
          discussed are yours to keep.
          
          
          
