While attending a seminar on European startups, one commentator criticized the Balkanization of corporate governance law throughout Europe. I was perplexed. True—whenever I dealt with the rollout of any entity in Europe, I regarded each country as sui generis – each country had its own particular characteristics as to formation, taxes, governance and board membership. Each country might also have different rules as to minority rights, etc. Even recently, I communicated with a Hungarian attorney to see how much authority the minority stockholder had with 30% ownership, and found out that it was substantially stronger than the rights in certain U.S. jurisdictions with identical minority ownership.
And the comment did not seem to acknowledge that the U.S. has 50 jurisdictions and corporate governance laws represented by 50 states. Some states have regulations that favor the stockholders and others that favor the companies. The fact that many law firms prefer to incorporate in Delaware, somewhere about 40% of the companies incorporate there, does not make it homogenous. For example, some states acknowledge Limited Liability Limited Partnerships (“LLLP”), others do not. Others permit the tax allowances for Limited Liability Corporations (LLCs), and, others, such as New York City, do not.
And the differences are not limited to entities, but also in franchise tax regimes. In Delaware, if the company has authorized over 5,000 shares, it is taxed directly proportional to the numbers of authorized shares. In California, where the company can authorize hundreds of millions shares, it is not exposed to additional franchise taxes, but the company owes no less than $800 in taxes after the first year of operations regardless of income. In fact, I see many law firms recommend that the startup incorporate in Delaware and authorize millions of shares assuming that those two factors will result in funding. But what if the company does not get that funding? Then that Delaware company is on the hook for Delaware franchise taxes reflecting its authorized shares and still obligated to pay its home state taxes as well. Since there are 49 other states, it is not fatal to be incorporated in another state and then transfer the entity at a later date if the investors insist on the change. Investors are evaluating the business model and current performance, not where the company is incorporated.
Let us go back to Europe. As I have observed, even with the European Community integration, each country has very specific corporate governance and tax laws. I don’t anticipate any changes that will fully integrate such laws under one uniform rule and regulations, in any way different that the 50 U.S. states. In fact, I am guided by international tax laws as to which European country needs to be the favored country for incorporation. Tax treaties become a factor when selecting foreign incorporation. And then one familiarizes himself/herself with the local corporate and tax laws in order to be compliant. Dealing with each European country has to be country specific and that will not change in my lifetime at least.