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HOW TO INCORPORATE

A Haven For Virtual Companies

Behind Vermont's unlikely ploy to attract online businesses
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Some of today's hottest companies are virtual: They operate exclusively online, with employees and customers scattered all over the world. Yet to do business, these companies typically are still required by law to maintain a terrestrial office, to hold real-life board meetings, and to keep a paper trail made from dead trees.

That may soon change. The state of Vermont is set to become the first in the nation to offer a legal framework for virtual companies. In May, the state's legislature voted to pass a law, which is expected to be signed this summer by Governor Jim Douglas, that would allow any private company to register in Vermont without opening a physical office, holding an in-person meeting, or filing a single sheet of paper. Companies could meet these requirements -- which are mandated by most states in order to legally register or open a bank account -- by using e-mail, instant messaging, or other software programs.

Vermont plans to charge fees of up to $275 a year for each virtual company registered, with state income taxes applying only to income generated in Vermont itself. The hope is to mimic the success of Delaware, which collects some $700 million a year in incorporation taxes and fees by offering low taxes, few regulations, and a business-friendly judicial system.

"This is a grand experiment," says Robert Litan, vice president of research and policy at the Kauffman Foundation in Kansas City, Missouri. Litan says the Vermont law will allow entrepreneurs all over the world to take advantage of the relative legal certainty of the Green Mountain State. An entrepreneur in Africa, for instance, could register a company in Vermont without hiring a lawyer or even traveling to the U.S. "This is going to allow for ways of doing business that we can't even imagine yet," Litan says.

The bill's backers envision Vermont attracting a new generation of community-based businesses like Wikipedia.

Although the online encyclopedia uses a management team and corporate bylaws to wrangle tens of thousands of unpaid contributors, under the new law a group of online workers could organize a company without a management team or traditional operating agreement. They could use a social networking program to run the company. "Bylaws could be put into software instead of writing," says Oliver Goodenough, a law professor at Vermont Law School and a faculty fellow at Harvard University's Berkman Center for Internet & Society.

The bill's advocates have a model in mind: Vermont's so-called captive insurance industry. Captives are subsidiary companies that act as insurers for their parent corporations and help them reduce their tax bills. Vermont began aggressively promoting itself as an alternative to Caribbean tax havens during the 1990s. Today, 580 companies, including Wal-Mart and Archer Daniels Midland, own Vermont-based captives that contribute taxes and fees totaling $25 million a year -- or 2 percent of the state's general fund budget -- while employing 1,400 people. Vermont's captive insurance industry is the world's second largest after Bermuda's.

The sponsor of the virtual company bill, Woodstock Democrat Alison Clarkson, says such efforts are essential in a small, rural state that cannot afford to woo companies with multimillion-dollar tax incentives. "It's unlikely that we're ever going to attract a huge manufacturer," she says. "We need to be savvy about our economic development."

Last updated: Jul 1, 2008




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