Tax benefits and more agile legislation to create companies are the main reasons. However, lawyers, startups and venture capital agree that companies that want to internationalize and be considered by high-level venture investors have to create companies in that small state on the east coast of the United States.
Default. That could be the quick answer to why many Chilean startups that plan to have business in several countries register their company in the state of Delaware, United States, as is the case with Betterfly, NotCo, Fintual, Poliglota and Fracttal, among others.
The reasons are various, but clearly the tax benefits, the legislation and the ease of starting a business make this place something of a standard. “Virtually all startups open companies in Delaware”. It is part of your alphabet. In addition, it is the recommendation that not only risk investors or venture capital (VC) make, but the most experienced entrepreneurs themselves ”, comments Claudio Barahona, partner of venture capital Alaya Capital.
But it is not only young companies that choose this area located on the east coast of the northern country. More than half of the firms listed on the US stock market are taxed in Delaware, and about 60% of Fortune 500 companies are in the same vein.
To understand the main reason – the tax factor – it should be clarified that US corporations pay local and federal (national) taxes. The latter reaches 21% overall. The state tax is in charge of each local administration which, for Delaware, is 8.7%. This figure is even higher than other states. Where is the advantage then? In that there is no state tax if the company does not operate in the territory.
Francisco Saffie, professor of Law at the Adolfo Ibáñez University and partner at Bruzzone & González Abogados, agrees that it is mainly for tax reasons. “The tax benefits allow financing in more efficient terms a startup from Delaware to Chile, in addition to the possibility of investing in other countries,” explains the lawyer.
Linked to the above, what many companies do is create a holding company from there to “hang” different companies to operate in other countries such as Mexico, Colombia or Chile, since “tax is also better, especially when the objective is to internationalize in several countries at the same time ”, indicates Barahona.
In fact, Delaware is the capital of the firms that use the name LLC (Limited Liability Company) or Limited Liability Company, which provides more flexibility than a traditional “Corp”. In addition, under this denomination double taxation is avoided. An LLC does not collect income tax and distributes 100% of the profits to its partners, who, in turn, will pay their income taxes. However, in some US states, natural (non-legal) persons do not pay state income taxes.
On the other hand, it is not necessary to be a resident of the United States to open an LLC. You only need a business address, which could even be an address used by the accountant of the startup that lives in that country. But LLCs can be created anywhere in the US, the difference is that in Delaware it is more expeditious. There is practically only one online form to fill out.
The venture capital ecosystem
All these benefits for those who start up mean that it is the same risk investment funds – which are also concerned about taxation – who recommend or request that startups have residence in Delaware, especially North American investors. For example, Y-Combinator, one of the world’s largest seed investment startup accelerators, requires beneficiary startups to create a partnership in Delaware, Canada, Singapore or the Cayman Islands, where there are tax benefits. The venture capital Kaszek Ventures, to name one of the most important at the regional level, also has similar demands.
“There’s not much talk about this, but in the end, Chilean startups end up being North American startups. They may be companies whose founders are Chilean, but the society that receives the profits and the investment is North American, “says Barahona, but clarifies:” However, if entrepreneurs want to ‘play the North American way,’ that is the way to go. Likewise, many of them pay salaries, offices and continue to invest in Chile, which is why the money also comes indirectly to our country ”.
Andrés Meirovich, managing partner at Genesis Ventures, has a similar idea. “The most sophisticated North American investor invests in dollars and just expects the startup to be in the Cayman Islands or Delaware. The same is true, for example, with Singapore. It’s true, they pay less taxes, but, on the other hand, a lot of money goes to Chile in salaries, investments and thousands of other things ”.
Francisco Guzmán, partner at Carey Abogados and president of the Chilean Venture Capital Association (ACVC), makes a difference. He believes that it is a mistake to think that Chilean startups are in Delaware only for tax reasons. “Technically not so. The correct view is that they do it because there are investors for investment rounds greater than a Series A. Although it has been increasing in recent years, if a startup wants to raise a seed fund in Chile, it does not go beyond US $ 500 thousand ”, he comments.
At the local level, a Series A investment is also possible, but usually does not exceed US $ 2 million, when in countries like the US it could reach up to about US $ 15 million. So when a startup wants to make more investments or even project a series B funding round (More than US $ 10 million), clearly it will prefer to be in the spyglass of larger investors, whose lenses are in Delaware. “In this place there are many VC investors, where a ticket of US $ 5 million is something quite common”, concludes Guzmán, and adds: “In the end, the investor sets the rules of where he is going to invest and that makes the startups create their parent company in other jurisdictions ”.
To get an idea, Cornershop raised US $ 21 million in 2017 during its Series B investment round. NotCo raised US $ 30 million in March 2019 in the same category; while last month Betterfly raised $ 60 million. The three Chilean companies have companies in Delaware.
“But ours has nothing to do with a tax issue”, clarifies Eduardo della Maggiora, CEO and Founder of Betterfly, and continues: “The first reason is because the legislation in that place is‘ investor friendly ’. In other words, VCs find it easier to start a business. But the other reason (which was because we made the decision) is because Delaware is the only US state, and one of the few places in the world, where you can create a Public Benefits Corporation (PBC) ”.
PBCs are a type of company with a legal structure where there is a fiduciary duty to have a social and environmental return, at the same level as the financial one. It is like a kind of Company B, but defined in its bylaws. This category is relatively new, and Betterfly is the first Latin American company with this structure, based in the United States. “In fact, a large part of the success of our Serie B was for being a PBC. In other words, an investor cannot sue us if I make decisions based on environmental or social arguments, ”says Della Maggiora.
