Incorporation

Incorporation - Nevada v Wyoming v Delaware

Kate Hiscox

January 30th, 2014

With the recent posts about LLC's v C corps, I thought I would throw 'where' into the mix. Wyoming is substantially cheaper to maintain than Nevada or Delaware (their requirements/benefits practically mirror Nevada) but is relatively new to the fold of 'corporate friendly' states. Thoughts?

Dave Angelow Board Member at HAND Austin

January 30th, 2014

Hi Kate

The costs are one element and the legal implications another.  From what I've seen whenever "smart money" (big $$$) in involved it's almost mandatory for a Delaware C corp due to legal reasons (I'm sure others can expand on the specifics).  

The result is a pay-me-now-pay-me-later kind of situation.  Perhaps save on fees in the near-term while very early stage and plan to change the legal entity structure later - question is do the savings off-set the future costs if a change is mandated.

John Adolph ♫ "Some people call me the firm lawyer / Some call me the startup CEO / No people call me Maurice"

January 30th, 2014

Kate,

In addition to being known as a generally corporate friendly state, one reason why so many corporations are formed under Delaware law is the extensive body of case law which has been developed by the Delaware Court of Chancery, a separate court of equity which usually handles disputes over the internal affairs of Delaware corporations.  Neither Wyoming nor Nevada have this advantage. Ultimately though, what should influence your decision is what you plan on doing with your company.  If you are looking to outside investors, VCs, etc. for investment, Delaware is what they are usually more familiar with.  Otherwise, you might consider being more flexible in your corporate approach and figure out what structure works best for your particular company.

Greg Upham

January 30th, 2014

I just had this question answered and it's simple: if you are looking for VC or VC type investment incorporating in Delaware is the one that all of them will know. This just makes things simpler when developing that partnership. Relative to the maintenance costs in my experience they usually aren't very intrusive.

Kate Hiscox

January 30th, 2014

Great feedback all - the last LLC we did was in Wyoming. Quick, cheap and easy and I highly recommend it for an LLC. For a C corp, I fully agree with Delaware based on the reasons mentioned here - specifically the existing case law which Wyoming lacks and the Court of Chancery.

Scott Foster Business and Entrepreneurial Attorney at Bulkley Richardson

January 31st, 2014

I have learned something very important from this - I'll be using Harvard Business Services for all of my clients from here on out. That is a bargain! Scott W. Foster 413 272 6258 Sent from my iPhone

Scott Foster Business and Entrepreneurial Attorney at Bulkley Richardson

January 30th, 2014

Generally speaking, organizing an entity in a state other than the one in which you will be doing business (i.e., where you get your snail mail), is a waste of money.  The exception to this rule is if you want to raise serious capital, you'll need to consider forming the entity in Delaware and then qualifying it to do business in your home state.  

You do not save one penny in taxes by forming an entity in another state.  Taxes are either incurred at a federal level (income), a state level (income, sales, some property) or local (some sales, property).  These taxes depend on either WHERE the transaction takes place, WHERE the principal place of business is (the home office) or WHERE the property is located.  Where you are incorporated or organized is not a factor.  

Lots of misinformation out there on this topic - some of which has been repeated by others that have responded to you.  

Will Glasson Assistant County Attorney, Multnomah County

January 30th, 2014

Short and incomplete response is most accredited investors (sophisticated) would rather rely on the consistent, practiced, battle-tested work of the DE Court to resolve a dispute. Not only are the jurists considered superior, the common law is more developed. Investors absorb all that and believe conducting business in DE will be more orderly, with fewer surprises. 

Juston Brommel Growth Strategist & Advisor to CEOs

January 30th, 2014

Agreed Kate. Most LLCs are going with Wyoming, as they have very favorable laws for privacy, control, taxes, etc. Most high-profile biz guys I know do business there. 

For VC Deleware C Corp is the formula.

Scott Foster Business and Entrepreneurial Attorney at Bulkley Richardson

January 31st, 2014

Raphael - the Delaware "franchise tax" is the equivalent to the "annual fee" charged in other states, however in Delaware this fee can be in the tens of thousands of dollars.  It is a tax in name only, but otherwise looks and feels like an annual fee.

Note also that registering/incorporating/forming in another state other than the one in which you reside will also require the entity to hire a "resident agent" or "registered agent."  This typically costs an additional $200 to $400 per year, but you can be the resident/registered agent if you are a resident of the state.

Overall - people waste about $1K when they register an entity in a state other than the one in which the company will actually have its office.  They waste even more going through legalzoom or some equivalent.

And no, an LLC is NOT a corporation.  It is an un-incorporated entity under every state's law.  An LLC could be taxed as a corporation, but that's a whole different discussion.

John Adolph ♫ "Some people call me the firm lawyer / Some call me the startup CEO / No people call me Maurice"

January 30th, 2014

Scott, people will sometimes say "incorporate an LLC" instead of "form an LLC," but if we really want to be sticklers about it, LLCs are not corporations.  They're hybrid entities blending corporate characteristics with partnerships.  

In Delaware, the forms provided are "certificate of incorporation" for a corporation (http://corp.delaware.gov/incstk09.pdf) and a "certificate of formation" for an LLC (http://corp.delaware.gov/llcform09.pdf).