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Why Mainland Chinese Businesses Should Form a Delaware LLC To Do Business in the United States

By IncNow | Published May 23, 2014

The differences in business law between China and the United States often come as a surprise to even the most sophisticated business people in China. Basic expectations and norms are very different which can make doing business a challenge. The first challenge is starting the business. This is an easy process, but the decision where to incorporate and what type of business entity to form should be made carefully because this choice has significant business implications. We recommend the limited liability company (“LLC”) over the corporation for tax flexibility and flexibility in ownership and management structure. While the process is fast and inexpensive, it is very important not to do the bare minimum by filing the certificate with the State of Incorporation. In addition to the filing, you should set up the internal operating agreement to make sure you follow formalities and have spelled out the ownership and management structure. An ounce of prevention in having the right documents is worth a pound of cure from a lawsuit. With the Delaware LLC formed, you will set your business up for success.

In the United States, businesses are incorporated at the state level and not by the federal government. To do business in the United States, you can either (1) use a foreign Chinese business qualified to do business in each state where it operates, (2) incorporate a new Delaware LLC subsidiary owned by your Chinese business (parent-child) or (3) a “parallel” Delaware LLC owned in mirror image with the same owners as the Chinese business (brother-sister). Most businesses choose the parent-child subsidiary opition. When you form a company in the United States, you must choose one of the 50+ states and territories for the incorporation jurisdiction. Although you may be more familiar with large states, it is not good to incorporate in California or New York. It is much better to incorporate in Delaware. You will then be a “domestic” Delaware LLC or corporation and can file a “certificate of authority” in other states where you do business. A Delaware LLC will be known as a “foreign LLC” in every one of the 49 states other than the state of incorporation.

Each state’s laws can be very different and your choice of formation state will impact your future foreign and applicable law for disputes. You have the power to choose the state law to govern internal affairs of your business at the time of formation. While in China the Chinese courts only enforce contracts written in Chinese that are fair and spell out all the damages, United States courts are very different. Each state has its own set of laws and its own state court systems. Some court systems are more business friendly. You will want to “opt-in” to the most business friendly state, Delaware, at the time of LLC formation.

Incorporating in Delaware as a subsidiary (parent-child) is the easiest way for Chinese based businesses to transition into the American corporate world; usually this is through a single member LLC in Delaware. Your Chinese business would be the member, meaning owner, of your Delaware LLC and all profits and losses would pass through the Delaware LLC to your Chinese business. This also should avoid double taxation. Delaware is recognized as the incorporation capital of the world with its business-friendly government as ranked by the U.S. Chamber of Commerce and CNBC television. Forming a business in Delaware results in advantages to both U.S. and Non-U.S. Residents. There are no restrictions on ownership of a Delaware LLC for Chinese individuals. Moreover, Chinese individuals and Chinese businesses can be the sole owners of Delaware LLCs. The process of incorporation in Delaware is much easier than most states.

To form an LLC in Delaware:

• No U.S. Social Security number is required;
• No presence in the U.S. and no U.S. address is required;
• No Delaware business address or office is required;
• No minimum capital in the company is required; and
• No income tax paid to Delaware if you are not doing business in Delaware.

Delaware law will provide Chinese based businesses in the United States with more legal protection than any other state. Delaware possesses the oldest dedicated business court in the country, the Delaware Court of Chancery. This Court has judges who are the best business lawyers selected by the Governor for their merit and not who they know or popularity. There are no juries, which can be like flipping a coin in other states. The Court of Chancery is known for predictability and well-reasoned decisions. Delaware is the best state for Chinese businesses and individuals to incorporate because Delaware offers unmatched flexibility to non-U.S. residents, such as the ability to draft LLC agreements and have all terms be enforceable, the ability to hold all officer positions in the Delaware entity, no Delaware physical address requirement, and one of the lowest costs to incorporate. Delaware is the gold standard for incorporating.

Unlike the Chinese system, United States business agreements are final documents and are not subject to change and negotiation after signing. In China, the written agreement is often just the beginning of the negotiation process. In contrast, in the United States, the contract is the end of the negotiation process and is usually strictly interpreted. Therefore, you should be careful before signing U.S. business contracts and only do so with your new Delaware LLC, with you signing as the manager of this LLC.

Chinese individuals and businesses can quickly and successfully form a Delaware LLC in approximately 4-7 days through our office. If Chinese individuals plan to have a bank account in the United States, they should apply for the EIN which is a 9-digit tax identification number called the Employer Identification Number. Our office can help you obtain an EIN.

If you wish to conduct business in the United States, we highly recommend you form a Delaware LLC with our office because it will provide you with the protection and predictability of the law you desire and will offer more advantages than any other state in the United States. Our office is available to assist in the incorporation process and to help your new business prosper.

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When deciding where to form your company, consider that Delaware has advantages over your home state that may benefit you. Go