INTRODUCTION

In an earlier article, we highlighted why some venture capital firms require Startups to incorporate an offshore holding company prior to funding. It has been reported that around seventy percent of Nigerian Startups that incorporate their parent companies outside Africa choose Delaware in the United States of America ("Delaware" or the "State").1 Interestingly, Delaware recorded almost 250,000 additional business registrations in 2020, increasing the number of businesses domiciled in the State to over 1.6 million.2

In this newsletter, we have set out below useful information for Startups who intend to set up a parent company in Delaware.

  1. Why do most Nigerian Startups register in Delaware?

There are several reasons a Startup may consider Delaware a country of choice for incorporating its parent company. Essentially, the State boasts of a business-friendly court system and tax laws that are favourable to Startups and investors. Most angel investors and venture capitalists prefer that the Startup they invest in is domiciled in Delaware.

  1. How does an investor provide funds to a Startup through its parent company?

Investors can invest in the Startup through the parent company and bring in capital to operate the Nigerian business through a Certificate of Capital Importation ("CCI") issued by an authorized dealer (usually a commercial bank) licensed by the Central Bank of Nigeria ("CBN"). This ensures that the investments and dividends can be repatriated to Delaware when required. Click here to read our newsletter on the Relevance of Certificate of Capital Importation to Foreign Investors.

  1. What are the forms of corporate organizations/structures for foreign Startups in Delaware?

There are various corporate structures in Delaware which include: Public Benefit Corporations; Public Benefit LLC; Limited Liability Partnerships (LLP); Limited Partnerships; Limited Liability Companies (LLC), corporations, etc. Notwithstanding this, the type of business structure typically preferred by Startups in Delaware is the corporation structure.

A corporation is a business entity which offers perpetual succession and personal liability protection for its founders, directors and members. A Startup registered as a corporation in Delaware has the ability to raise investments by selling shares of stock in the corporation.3

  1. Is there a minimum shareholding requirement for foreign Startups in Delaware?

Delaware does not have a minimum capital requirement to form a corporation. Furthermore, corporations may be incorporated with a single director and single shareholder of any nationality. It is also not compulsory for corporations to have a resident director or physical address to conduct their businesses in Delaware.

  1. What are the requirements to qualify for registration in Delaware?

To set up a Delaware corporation the applicant is required to:

i. choose and reserve a corporate name that must not be similar to the names of other business entities already registered with the Delaware Secretary of State;

ii. complete a Certificate of Incorporation which must include the proposed name, address for service, purpose, authorised number of shares/stock to be issued by the Startup and the names of the initial directors; and

iii. submit the Certificate of Incorporation through an appointed registered agent for filing.

Upon a successful review of the application, the applicant will be issued an approved Certificate of Incorporation by the Delaware Division of Corporations. It is important to note that corporations with foreign founders such as Nigerian founders are required to file an annual tax report with the Delaware secretary of state. Failure to comply on time can result in payment of a penalty as prescribed by the State.4

  1. Are there any tax implications for Startups in Delaware?

Delaware is a low tax jurisdiction, therefore, newly registered corporations and companies who conduct their businesses outside Delaware are not required to pay state income taxes. Furthermore, shares of stock owned by non-residents are not subject to Delaware taxes.5 Nonetheless, all companies (excluding non-profit making organizations) are mandated to pay an annual fee known as a Franchise Tax to the State. The Franchise Tax may be calculated based on the authorized shares or assumed par value capital of the corporation.6

CONCLUSION

In determining whether or not to set up an offshore entity in Delaware, Startups must carefully consider the pros and cons of this decision. Although Delaware offers some great advantages, establishing a parent company in Delaware can also be cost-intensive for small Startups, particularly where they do not intend to raise investments through venture capital funding.

Footnotes

1 Tom Jackson 'Why African tech startups are increasingly domiciling overseas'

'https://disrupt-africa.com/2020/03/10/why-african-tech-startups-are-increasingly-domiciling-overseas

2 Delaware Division of Corporation 'Annual Status Report' https://corp.delaware.gov/stats/

https://www.nolo.com/legal-encyclopedia/how-form-corporation-delaware.html

3 UpCounsel 'Delaware C Corp vs LLC: Everything You Need to Know'https://www.upcounsel.com/delaware-c-corp-vs-llc'

4 Delaware Division of Corporations 'Annual Tax Report and Information' https://corp.delaware.gov/frtax/#:~:text=The%20penalty%20for%20not%20filing,in%20December%20of%20each%20year

5 Offshore CompanyCorp 'Why Do Companies Incorporate in Delaware, USA' https://www.offshorecompanycorp.com/insight/jurisdiction-update/why-incorporate-in-delaware-us

6 Trent Dykes 'Delaware Franchise Tax: An Overview' https://www.dlapiperaccelerate.com/knowledge/2018/delaware-franchise-tax-an-overview.html

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.