The set-up and use of a DHC as part of the Initial Public Offering (IPO) process can result in a significant enhancement of profitability.

The set-up and use of a DHC as part of the Initial Public Offering (IPO) process can result in a significant enhancement of profitability by virtue of the state tax savings inherent in DHCs. Similar benefits result from the use of a DHC in connection with secondary offerings, as well.

With all the normal time pressures and deadlines involved in most public offerings, many advisors often do not want to consider the added effort of adding a DHC to the corporate structure. This is unfortunate. The set-up of a DHC is easy and inexpensive, but the benefits can be significant. Although every situation is different, the initial set-up costs usually run less than $2,500 and annual operating costs are normally in the $10,000 range. The benefits can run into the hundreds of thousands - or even millions - of dollars per year.

There are three ways in which the use of a DHC can reduce the level of state income tax. The first revolves around the proceeds received by a corporation as part of the public offering process. These proceeds can be used to capitalize the DHC, and can then be invested by the DHC until needed to fund the operations of the corporation. In many  offerings, at least a part of these funds could be invested for six months, a year, or longer until needed for operations. By virtue of being held and invested by the DHC, the investment return (dividends, interest, etc.) would be free of state income tax.

The second benefit results when the funds are actually needed for operations. The DHC would then lend the funds to the parent corporation and/or the operating entities of the parent corporation, resulting in the DHC receiving interest payments (at market rates) from these entities. The net effect of these transactions would be interest expense deductible in the states where the other entities were domiciled, and non-taxable interest income in Delaware.

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