Why do so many people choose to incorporate in Delaware or Nevada?
Obviously, incorporating in the state you conduct most of your business would be ideal. In a perfect world, incorporating in your home state would be simple, quick, inexpensive, and convenient. This is definitely not the case, though, as many states are a pain in the *** to get your business set up in. For instance, California, which boasts the largest population in the country, and booming startup environments all over the state, can take up to 3 weeks to register a company (it once took the CA Secretary of State 24 days to register a General Stock Corporation using their form). Further, California is only now beginning to transition to online filing, and only for a few important forms (the Statement of Information). Additionally, California’s Franchise Tax Board imposes an $800 minimum franchise tax, the SOS charges $100 filing fee to incorporate, and another $25 to file the Statement of Information.
It is no wonder, then, that some founders may look to other states to gauge how they can save valuable time, resources, and headaches.
Delaware and Nevada, unlike most states, have designed their legislation, tax structures, and regulatory schemes to be extremely favorable for corporations. Obviously, like all major legal decisions, there are both pros and cons to incorporating in either state.
As of 2014, 64% of Fortune 500 companies (close to one million business entities overall) have set up shop in Delaware. There are three major legislative reasons why so many companies do so:
Delaware’s General Corporation Law: This set of laws was designed to be adaptable and changeable. This refined statute is biased against regulation. Delaware is notorious for providing the strongest protection to corporate directors and officers from liability, which is a major cost cutter in terms of high-cost corporate insurance. Another great aspect of this legislation is the provisions providing simple and smooth mechanisms through which a corporation can change its legal structure (e.g., to an LLC, Partnership, etc.).
The Court of Chancery: Delaware’s Court of Chancery was established in 1792 and is a jury-free court with a long, written history of corporate law. Former SCOTUS Chief Justice William Rehnquist once describer the Court of Chancery as one that “allows business planners to order their affairs to avoid lawsuits.” This court does not handle tort or criminal law cases, which allows it to operate much quicker than other courts around the country.
Delaware’s Division of Corporations: This Division of the Delaware Secretary of State’s office actually makes a profit, because its actually set up to run like the businesses it serves. This Division provides quick and easy online forms for a number of different services and information gathering. This division is also open until midnight, and provides 1 hour, 2 hour, same day, and 24 hour processing for important documents.
Delaware has also allowed for extreme flexibility in for shareholders in corporations. The court has held that even a single, anonymous person can set up a corporation in Delaware. This is highly unusual due to its lack of transparency.
Nevada: Clarity, ease, and savings in the Wild West
Since the turn of the century, the rate of companies incorporating in Nevada has exploded every year. It seems as though Nevada is attempting to emulate Delaware’s corporate environment. There are a few main reasons Nevada has seen such an increase in incorporation.
Nevada’s courts consistently help prevent hostile takeovers, which is one of the main reason corporations initiate litigation against other companies.
Nevada’s courts have provided consistent, and strong protection for founders, directors, and officers against piercing of their corporate veil (see my previous post on this subject here). Since 2012, the corporate veil has only been pierced twice in Nevada.
One of the things I find most exciting about the Nevada corporate environment is the corporate tax situation (or lack thereof). In Nevada, there is no franchise tax, no corporate income tax, and no personal income tax. There is, however, an annual $200 business license fee.
Both of these states look pretty attractive for your new business, huh?? Well, here’s a side-by-side comparison:
The minimum cost to form a Delaware corporation is $89.00. The state has no corporate income tax or business license requirements, but its franchise tax is much higher than a lot of states.
The minimum cost to establish a Nevada corporation is $400, which includes listing the officers (like the $25 Statement of Information in CA), and the business license.
Neither Delaware nor Nevada requires a corporation to hold board meetings in the state, so your business’ headquarters can be in any state (as long as you have a registered agent in the state).
Be careful though. Both the state and federal tax authorities have taken notice that many companies utilize favorable corporate environments for tax evasion or other loopholes. It may make sense for a company with strong earnings or hopes of going public someday to incorporate in one of these states. Keep in mind that your home state may sometimes offer tax incentives to stay in the state.
Chat with one of our knowledgeable Santa Monica business lawyers today regarding your startup's needs.
About the Author:
Dallas P. Verhagen is a business attorney and a partner at Verhagen | Bennett LLP. To learn more about Dallas, please click here.
For questions or comments about this post, please email Dallas directly at: Dallas@VerhagenBennett.com
To make suggestions about future posts, please email: Info@VerhagenBennett.com
© 2017 Dallas P. Verhagen — This article is for general information only. The information presented should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.