Sunday, October 24, 2010

How to choose state of incorporation for start-ups: a comparative study of Delaware, Nevada and Wyoming legislation. Conclusion - Part V

This posting concludes my comparion of Delaware, Nevada and Wyoming business-related legislation.  In this posting I draw conclusions about where one should actually consider registering the business.  Generally, a company has to register in every state where it conducts business in order to enjoy limited liability in that state. This also means that the company would have to pay taxes in every state where it registers and be subject to local reporting obligations. If a company does business in one state only, then it is preferable to incorporate in that home state, thus saving on taxes, registered agent fees and registration paperwork elsewhere. However, if a company plans to conduct business in several states, then such company should carefully choose which state would be most suitable for its needs.

Large companies with complex structures or those companies that plan to go public should consider Delaware as the state of incorporation. It is almost expected that a company going public be a Delaware corporation. In the 1990s, for example, the share of Delaware companies’ IPOs registered on the New York Stock Exchange increased to 73-77%.  After all, Delaware’s corporate laws are the most flexible, its Chancery Court is the oldest in the country, and the abundance of business law precedent is clear. However, costs of incorporation and ongoing tax obligations in Delaware may be substantial.

Smaller companies and start-ups may consider choosing a state that provides a cheaper alternative. Wyoming appears to be the least expensive state in terms of incorporation, annual taxes and filings fees, as compared to Nevada or Delaware. However, it is unclear whether litigating there would be the best option for a start-up, given the geographic location and absence of a court system specifically dedicated to resolving business disputes. Wyoming and Delaware afford businesses the most privacy, as compared to Nevada. Wyoming and Nevada, on the other hand, are the most management-friendly in terms of antitakeover protections included in their statutes.

This article has discussed only several of the many considerations that should go into deciding in which state to incorporate. Each company is unique, and legal advice relating to the state of incorporation should be carefully tailored to each particular company. In addition, the choice of where to incorporate is an important one but does not necessarily have to be a permanent one, as it is always possible to re-incorporate in a different state, as the companies grow and their business needs and priorities change.

Thursday, October 21, 2010

How to choose state of incorporation for start-ups: a comparative study of Delaware, Nevada and Wyoming legislation. Part IV.

Below is Part IV of my article comparing certain aspects of Delaware, Nevada and Wyoming business-related legislation. As I said earlier, I wrote this in April of 2010, so the information here may have become outdated. Information contained is this article is for informational purposes only, so please check each state’s laws before making any legal or other decisions with respect to your business. In this Part I discuss two issues that are of interest to business owners: managerial liability and antitakeover provisions.

Managerial Liability

The following discussion pertains to corporations only. Section 102(b)(7) of Delaware General Corporate Law allows shareholders to include a provision in the corporation’s certificate of incorporation exculpating a director for breach of fiduciary duty, except if the director breached duty of loyalty, for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, or if a director derived an improper personal benefit. This provision does not extend to officers. However, recently the Supreme Court of Delaware held in Gantler v. Stephens29 that corporate officers owe the same fiduciary duties as corporate directors. The Court suggested in footnote 37 that in this case corporations should have the ability to exculpate officers as they are allowed to do in the case of directors. It remains to be seen whether legislature will extend Section 102(b)(7) to corporate officers.

While Delaware’s Section 102(b)(7) does not itself limit personal liability of directors but allows shareholders to do so in the charter, Nevada’s Private Corporations Law uses the opposite approach and provides that a director or officer is not individually liable to the corporation, its stockholders or creditors unless there is a breach of fiduciary duties, fraud, intentional misconduct or a knowing violation of law, and unless the articles of incorporation provide for a greater personal liability.30  Unlike Delaware’s law, Nevada’s law covers officers.

Similarly, Wyoming Business Corporation Act provides that officers and directors are not personally liable to the corporation or its shareholders absent certain factors (different standards apply to officers and directors).31

Comparing the three approaches to the statutory limitations on directors’ and officers’ personal liability, it is clear that Nevada’s is the broadest, as it applies to both groups and exculpates directors and officers from personal liability to the corporation, shareholders as well as creditors.

Antitakeover Provisions

This section also focuses on corporations. An issue which primarily concerns companies with many shareholders32 is the state’s stance on antitakeover provisions. Shareholder rights plans or “poison pills” are generally legally vulnerable because they discriminate against specific shareholders. Although these may not be immediate concerns for a start-up company, choosing a state with strong antitakeover laws may save the company costs of reincorporating in a different state down the road.

Nevada and Wyoming have very strong antitakeover laws because, unlike Delaware, they do not impose enhanced fiduciary duties on directors in takeover situations. Instead, they apply the business judgment rule to the use of antitakeover tactics. Nevada does not restrict directors from issuing defenses in response to hostile takeover threats even if they “deny rights, privileges, power or authority to a holder of a specified number of shares or percentage of share ownership or voting power.”33  Although, given the powers granted to directors by Section 78.138.4 of the Nevada Private Corporations law, a “poison pill” may not be necessary to enact at all, since the directors are free to reject a hostile bid in the interests, for example, of the State economy or society:34

Directors and officers, in exercising their respective powers with a view to the interests of the corporation, may consider:
(a) The interests of the corporation’s employees, suppliers, creditors and customers;

(b) The economy of the State and Nation;

(c) The interests of the community and of society; and

(d) The long-term as well as short-term interests of the corporation and its stockholders, including the possibility that these interests may be best served by the continued independence of the corporation.
This is an extremely management-friendly provision that allows directors to consider the interests of shareholders as just one factor among others. Wyoming’s legislature offers an almost identical management-friendly language in Section 17-16-830 of its Wyoming Business Corporation Act.

Delaware, on the other hand, requires heightened fiduciary duties from their directors, as elaborated in the Unocal and Revlon35 decisions. Delaware courts apply the Unocal standard to ensure that the directors’ defensive actions are reasonable in relation to their belief regarding the danger of the takeover to the corporate policies and proportionate to the magnitude of the perceived threat to the corporate policies.36  Therefore, it may be more difficult for Delaware directors to resist a takeover attempt. In response to the concerns with the heightened fiduciary duties of directors, as per the Unocal and Revlon decisions (decided in 1985 and 1986, respectively), in 1988 Delaware’s legislature adopted an antitakeover law (Section 203 of the Delaware General Corporation Law). This section prevents buyers of more than 15% of a target company’s stock from completing its acquisition for three years. A takeover could be completed if (i) the buyer purchased over 85% of the stock, (ii) the target’s board approved it prior to the transaction or (iii) the target’s board and the holders of two-thirds of outstanding shares (excluding shares held by the buyer) approve the takeover at or after the transaction. However, in January 2010, the constitutionality of Section 203 was challenged by the Harvard Professor Guhan Subramanian et al. in his paper “Is Delaware’s Antitakeover Statute Unconstitutional? Evidence from 1988-2008.”37 The debate continues, and the future of this antitakeover provision remains to be seen.


29  See Gantler v. Stephens, No. 132, 2009 Del. LEXIS 33 (Del. Supr. Jan. 27, 2009) (unpublished decision).

30  See NEV. REV. STAT. § 78.138.7 (2001).

31  See WYO. STAT. ANN. § 17-16-842(d) and 831.

32  Bishop, supra note 3 at 4. In closely held firms, there is often little or no separation of capital and management, therefore there is less likelihood of the interest of the owners and managers to diverge.

33  NEV. REV. STAT. § 78.195.5.

34  NEV. REV. STAT. § 78.138.4.

35  Revlon duties come into play when the sale of the company is inevitable. See Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A. 2d 173 (Del. 1986).

36  See Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (1985), Moore Corp. v Wallace Computer Services, 907 F. Supp. 1545, 1556 (D. Del. 1995).

37  Available at's%20Takeover.pdf.

This article is not a legal advice, and was written for general informational purposes only.  If you have questions or comments about the article or are interested in learning more about this topic, feel free to contact its author, Arina Shulga.  Ms. Shulga is the founder of Shulga Law Firm, P.C., a New York-based boutique law firm specializing in advising individual and corporate clients on aspects of business, corporate, securities, and intellectual property law.

Saturday, October 16, 2010

How to choose state of incorporation for start-ups: a comparative study of Delaware, Nevada and Wyoming legislation. Part III

In this Part III I will focus on the costs of incorporation and annual fees and taxes to determine which state out of three is the least expensive. I will take a look at the privacy laws of the three states, since privacy is a major concern for business owners. Just a reminder: all the information here is as of April 2010, and may have since become outdated.

Incorporation Fees

The fee for incorporating a corporation in Delaware is a minimum of $89, but is increased incrementally if the amount of authorized capital exceeds $75,000. The fee to file a document of formation is $90 for an LLC and $200 for LP, LLP (per partner) and statutory trust.

Wyoming charges a flat fee of $100 to form any of its business entities.

Nevada charges a flat fee of $75 to form an LLC, an LP or an LLP, and $100 - an LLLP. For corporations, Nevada bases the amount of fees on the value of authorized share capital (fees start at $75 for the capital of $75,000 or less and gradually increase to $375 for capital valued at less than $1 million, with incremental increases to a maximum fee of $35,000).  There is also a requirement to file an initial officer and director/member and manager/general partner list with an accompanying fee of $125.

These price differentiations among the three states indicate that (1) it is relatively inexpensive to form an LLC in either state; (2) Nevada and Delaware are more expensive places of incorporation for big corporations as they calculate the filing fees based on the amount of capital stock; and (3) Delaware has generally higher fees to form an LP, LLP, LLLP and trusts than do Nevada and Wyoming.

Annual Fees and Taxes

A look at the state’s annual fees and taxes shows that Wyoming is the least expensive incorporation state as compared to Nevada or Delaware. Wyoming’s annual license tax is based solely on the value of all assets located and employed within Wyoming. The minimum fee is $50 and it increases based on the amount of assets within the state.21  Additionally, Wyoming has no corporate income tax, personal income tax, inventory tax, tax on intanglible assets such as stocks or bonds, and there is no legislative plan to implement these types of taxes.22

Nevada, on the other hand, charges a yearly $125 ($175 for some LLLPs) officer and director filing fee and imposes an additional business license fee of $200 per year on corporations, LLCs, LP, LLPs and LLLPs (last increased on July 1, 2009).23 There is also a requirement that domestic and foreign corporations (including close and professional corporations) pay an annual list fee calculated based on the amount of authorized stock, with a minimum fee of $125 and a maximum fee of $11,100. Like Wyoming, Nevada does not at this time charge a corporate income tax, franchise tax, personal income tax, inventory tax or tax on corporate shares.

In Delaware, all corporations have to file an annual report and pay a filing fee of $50. In addition, all corporations have to pay franchise tax for the privilege of incorporating in Delaware, calculated based on the number of authorized shares or assumed no par capital (minimum tax is $75 and a maximum tax is $180,000).  GPs, LPs, and LLCs do not file an annual report but pay an annual fee of $250, and LLPs and LLLPs have to file an annual report and pay $200 per partner. 24  Delaware also levies a corporate income tax on domestic corporations (those corporations that do not conduct business in the state, although are incorporated there, do not have to file a tax return).25  Delaware does not impose a state or local sales tax, but does impose a gross receipts tax on the seller of goods (tangible or otherwise) or provider of services in the state.


Concerns about privacy may be the deciding factor for some businesses if asset protection issues are involved. Nevada requires that all business entities file annual lists with the state, which contain the name and resident or business address of partners, officers, directors, managers or managing members of business entities incorporated in Nevada. It is possible to search the state website for business-related information not only by the name of the business but also by officer’s name. In Nevada, shareholders can vote by proxy, valid only for 6 months, unless the appointment document provides a different length of time, not to exceed seven years. 26

Wyoming’s annual update reports do not require disclosing the names of business owners except for the person signing the report. Wyoming also allows nominee shareholders (designated persons to appear on public record instead of the actual persons involved) as well as action by lifetime proxy. 27

Similarly to Wyoming, Delaware does not require disclosure of the names of business owners, directors or officers of business entities in its filings, allows nominee shareholders and provides for lifetime proxy.28 Therefore, it appears that Wyoming and Delaware laws offer greater privacy protection to the business owners of the entities formed in their states than Nevada.
21 Wyoming requires its business entities to file an annual report on or before the first day of the anniversary month of the company’s incorporation and pay a license tax (except for statutory trusts). The cost is $50 or two-tenths of one million on the dollar ($.0002), whichever is greater, on the portion of the corporate assets located and employed in Wyoming. See Wyoming Secretary of State, Frequently Asked Questions, available at (last visited Mar. 25, 2010).

22 See Wyoming Department of Revenue, Income Tax, available at (last visited Mar. 25, 2010).

23 See Nevada Secretary of State, Forms and Fees, available at (last visited Mar. 25, 2010).

24 See Delaware Division of Corporations, How to Form a New Business Entity, available at (last visited Mar. 25, 2010).

25 Delaware Division of Revenue, Filing Corporate Income Tax, available at (last visited Mar. 25, 2010).

26 See NEV. REV. STAT. § 78.355 (1991).

27 Effectively, it is possible to appoint lifetime proxies, as Wyoming Business Corporation Act provides for the appointment of proxies for an 11-month period unless a longer period is expressly provided for in the form of appointment. See Wyo. Stat. Ann. § 17-16-722(c).

28 DEL. CODE. ANN. Tit. 8, § 212(b) (providing that a proxy is for a period of three years, unless the proxy provides for a longer period).

Thursday, October 14, 2010

How to choose state of incorporation for start-ups: a comparative study of Delaware, Nevada and Wyoming legislation. Part II

In this part I am discussing the ability of Delaware, Nevada and Wyoming courts to handle corporate law cases.

State Court System

Delaware has been praised for its court system.12  Delaware has a separate Court of Chancery, dating back to 1792, which is a business law court where judges are appointed on merit, not elected. This Court has no juries, and decisions are issued in a form of written opinions. Delaware business case law is abundant and there is much precedent for corporations to refer to when considering what actions they can and cannot take. Delaware business law (statutes and precedents) has come to be considered as the “national corporation law” since all lawyers are well familiar with it, having studied it in law school, and the most well-known business-related decisions have come out of Delaware courts.13

However, there is also some criticism about the effectiveness of the Delaware courts and unclear standards they set. It has been said that "the [Delaware] law governing the responsibilities of directors has become so muddled that, incredibly, one can't get a consistent answer to the most basic corporate law question of how many fiduciary duties directors have - if you ask Delaware lawyers, the answer can range anywhere from two to five!"14  Uncertainty about case law is exacerbated by the high reversal rate for decisions from the Court of Chancery of approximately 25%.15  Also, the length of litigation of cases has been extensive: for example, certain cases involving “fairness” considerations took an average of 8.7 years to resolve.16  Frequency of litigation is also alarming: in 1999 and 2000, there were 1,280 complaints filed, of which 78% were related to breaches of the fiduciary duties.17

Nevada created a business court system in 2006 based on the Delaware, Maryland, Pennsylvania and North Carolina models. The business court system was created specifically for the purpose of attracting new businesses by minimizing the time, cost and risks of commercial litigation.18  It exists within the district courts of Washoe and Clark counties, where several judges are selected to primarily handle business cases, even though they also handle criminal and civil cases. Judges are selected based on their experience in business litigation. As per Nevada Secretary of State’s website, the court system offers “early, comprehensive case management, active judicial participation in settlement, priority for hearing settings to avoid business disruption, and predictability of legal decisions in commercial matters.”19  However, no written precedent exists as the court rules do not allow the publishing of opinions. A creation of a separate chancery court like the one in Delaware would require a constitutional amendment. 20

Wyoming does not appear to have a court or judges exclusively dedicated to business litigation, although it is probable that Wyoming has sufficient precedent relating to LLCs, given that Wyoming was the first state to adopt an LLC statute in 1977. Therefore, given the criticisms of the Delaware courts, lack of published written opinions in Nevada business court system and the fact that Wyoming does not appear to have a court specifically dedicated to business-related matters, it remains uncertain which of the three states should be preferred in terms of litigating business disputes.
12  See Lewis S. Black, Jr., Why Corporations Choose Delaware, (2007), available at (last visited Mar. 25, 2010).
13  See id.

14  William J. Carney and George B. Shepherd, The Mystery of the Success of Delaware Law: the Mystery of Delaware Law's Continuing Success, 2009 U. Ill. L. Rev. 1 (2009) (quoting Paul T. Schnell, From the Editor - M&A at Year-End, M&A Law, Glasser LegalWorks, N.Y., Jan. 2005, at 3-4).

15  See id. (referring to Norman Veasey et al., The Role of Corporate Litigation in the Twenty-First Century, 25 Del. J. Corp.L. 131, 135 (2000)).

16  See id. (referring to Kahn v. Lynch Commc'n Sys., Inc., 638 A.2d 1110 (Del. 1994) (nine years); Rabkin v. Philip A. Hunt Chem. Corp., 498 A.2d 1099 (Del. 1985) (6.5 years); Rosenblatt v. Getty Oil Co., 493 A.2d 929 (Del. 1985) (8.3 years); Weinberger v. UOP, Inc., 457 A.2d 701 (Del. 1983) (eleven years)).

17  See id. (quoting Robert Thompson & Randall Thomas, The Public and Private Faces of Derivative Lawsuits, 57 Vand. L. Rev. 1747, 1761 (2004)).

18  Nevada Secretary of State, Why Incorporate in Nevada, available at (last visited Mar. 25, 2010).

19  Id.

20  See Arnold M. Knightly, New Business Court Called Unnecessary, (Jan. 30, 2009), available at

Monday, October 11, 2010

How to choose state of incorporation for start-ups: a comparative study of Delaware, Nevada and Wyoming legislation: Part I

Part I

I am publishing here my article that I wrote back in April 2010 (with assistance from Leia Glasso, a law school student at Cardozo Law School) regarding where to incorporate a business. I decided to compare Delaware, Nevada and Woyming legislation since I have been receiving many inquiries as to how these three states compare in terms of their business legislation.  I would like to warn, however, that none of the information below contains any legal advice and that I wrote this piece five months ago, so the laws of these states may have changed since then.  That said, I hope you will still find the information below useful!


It has become increasingly popular for companies to choose to abandon their home state and decide to incorporate out of state. However, not in all cases incorporating elsewhere represents the best decision for the business. This article discusses some advantages and disadvantages of incorporating in a state other than the home state, specifically focusing on the states of Nevada, Wyoming and Delaware.

Some lawyers are likely to believe that there is less risk of error or surprises when they recommend for their client to incorporate in the home state. This is due to two facts: first, they know the law and the accompanying case law already, and secondly, they are concerned about the cost and inconvenience of litigation in another jurisdiction.1  So when businesses do look out of state, what do they look for? In addition to the types of entities, availability of precedent and reliable court system, incorporation costs, annual fees and taxes, they also check to see how particular states deal with the issues of privacy, managerial liability and antitakeover provisions. This article aims to compare legislation in Delaware, Nevada and Wyoming in each of these areas.

It is commonly known that incorporating in Delaware has numerous advantages (as explained below). However, in recent years, other states have “waged aggressive and successful campaigns to attract corporate charters.”2  Among these states are Nevada and Wyoming. Small Business and Entrepreneurship Council ranked Nevada, Wyoming and Delaware as numbers 2, 3 and 34, respectively, in its Small Business Survival Index 2008, with lower rankings representing the most business-friendly states.3  So, how do these states really compare from the point of view of an entrepreneur?

Types of Entities

More than 882,000 companies are incorporated in Delaware, including approximately 64% of Fortune 500 companies and more than 50% of all public companies.4  In Delaware, one can incorporate a corporation, a close corporation (limited to 30 shareholders), a limited partnership (LP), a limited liability company (LLC), a limited liability partnership (LLP), a limited-liability limited partnership (LLLP)5 and a statutory trust. It is also possible to form a series LLC, where limited liability protection is provided across several “series”, each of which is insulated from the other (like a corporation with subsidiaries).6  Of 121,628 new entities formed in Delaware in 2008, 67% were LLCs, 24% were corporations, 6% were LPs/LLPs and 2% - statutory trusts.7

In recent years the number of companies incorporating in Nevada has skyrocketed: in 1994, 22,704 new companies incorporated in Nevada, whereas in 2006, a total of 84,207 companies incorporated there.8 In Nevada, one can register a corporation, a close corporation (limited to 30 shareholders), an LLC (including a series LLC) 9, an LP, an LLP, an LLLP and a business trust. Out of 84,207 new companies in 2006, 49% were LLCs, 47% were corporations, 3% were limited partnerships and the remaining 1% - limited liability partnerships and business trusts.

In Wyoming, one can form a corporation, a close corporation, an LLC, a close LLC, an LP, a registered limited liability partnership (a general partnership that registers in a limited liability form), an LLLP10 and a statutory trust. Wyoming was the first state to adopt an LLC statute in 1977. Close corporations and close LLCs were created for small or family-owned businesses and, similarly to close corporations, close LLCs include restrictions on interest transfer and withdrawal of capital contributions. 11

In addition to the more traditional entity choices, all three states allow for the creation of LLLPs, and Delaware and Nevada (but not Wyoming) allow creation of series LLCs. Like Nevada and Delaware, Wyoming provides for a formation of close corporations and, singularly, close LLCs, to best protect the interests of small and family-owned businesses.

Part II will compare the states’ court systems.
1  Keith Paul Bishop, There are Many Benefits to Incorporating in Nevada, But Tax Avoidance Is not One of Them, LA Lawyer (Nov. 2008).

2  Bishop, supra note 1.

3  Small Business and Entrepreneurship Council, Small Business Survival Index 2008 (13th edition), available at[1].pdf (last visited Mar. 25, 2010).

4  Delaware Division of Corporations 2008 Annual Report (June 29, 2009), available at (last visited Mar. 25, 2010).

5  An LLLP is a relatively recent form of entity (currently only 18 states have adopted LLLP statutes), where general partners can also enjoy limited liability for debts and obligations of the limited partnership. In a traditional limited partnership, only the limited partners have limited liability and are not responsible for the debts and obligations of the partnership beyond their capital contributions while the general partners are jointly and severally liable.

6  Each LLC may hold its separate assets, have different purposes, incur liabilities, have different members and managers and enjoy limited liability protection, while the series LLC pays one filing fee and files one yearly income tax return. Delaware was the first state to approve a series LLCs, since joined by eight other states. However, the federal tax treatment of a series LLC has not been fully resolved and there are questions as to the treatment of series LLCs in other states that do not statutorily provide for such entity.

7  See Delaware Division of Corporations 2008 Annual Report, supra note 6.

8  Nevada Secretary of State, Filing Statistics, available at (last visited Mar. 25, 2010).

9  See NEV. REV. STAT. § 86.1255, Nev. Rev. Stat. § 86.161(1)(e) (2005).

10  See WYO. STAT. ANN. § 17-14-202, 301, 503(c) (1971).

11  The main characteristics of a Wyoming close corporation include: no more than 35 shareholders, limitations on share transfers, buy-out provisions in case of deceased shareholders, and relaxed corporate governance standards (no need for a board of directors or annual meetings). See “Choice is Yours” available at (Apr. 2009) (last visited Mar. 25, 2010).

Sunday, October 10, 2010

Work-for-Hire: what’s the big deal about it?

A lot has been said and written about why businesses need to have work-for-hire agreements with their freelancers. Yet I find that some of my clients and business owners I meet at networking receptions have no idea what I am talking about and why anyone would need this additional piece of paperwork. I agree, the reason for having work-for-hire agreements is somewhat counterintuitive and it has to do with copyright law. The U.S. Constitution grants the initial copyright in a work to its creator. As usual, there is an exception that applies to work made for hire: (1) if an employee creates the work as part of his or her job, then the copyright vests in the employer, and (2) if the parties expressly agree that the work is work made for hire and it falls within one of nine categories, then the copyright vests in the person/entity that commissioned the work.

So, let’s imagine a scenario where a business owner hires an independent contractor to create website content for his business and pays him for this one-time project. It would be natural to assume that the business owner owns the copyright to the end result since he paid for it. However, this is not automatically the case because the independent contractor has a constitutionally protected copyright to the content that he has created. He is also not an employee, so the first exception does not apply. The only thing that would protect the business owner is a work-for-hire agreement that he has (hopefully) entered into with the independent contractor, in which the independent contractor (the original creator) transferred his intellectual property rights to the business owner. I hope now you see the importance of these agreements.

The U.S. Copyright Act of 1976 defines work made for hire as “(1) a work prepared by an employee within the scope of his or her employment; or (2) a work specially ordered or commissioned . . . . . , if the parties expressly agree in a written instrument signed by them that the work shall be considered a work made for hire.”

One further limitation: a work for hire must come within one of the nine categories listed below: (1) a contribution to a collective work, (2) a part of a motion picture or other audiovisual work, (3) a translation, (4) a supplementary work, (5) a compilation, (6) an instructional text, (7) a test, (8) an answer material for a test, or (9) an atlas.

In all other circumstances, there needs to be an additional assignment or licensing provision to make the assignment effective. There is room for negotiation, of course, as licenses can be made exclusive or nonexclusive, worldwide or limited to a certain geographic location, granted in perpetuity or limited to a certain amount of time, royalty-free or otherwise...

An additional question may arise as to whether the person who created the work was in fact an employee or an independent contractor. But this is a topic for another blog.

Tuesday, October 5, 2010

Proposed IRS Regulations on Series LLC

What is a series LLC?

A series LLC is a relatively new entity form that provides for the creation of multiple LLCs under the umbrella of one organization, like a corporation with multiple subsidiaries. This entity form was first enacted in Delaware in 1996, and is sometimes known as Delaware LLC. Creating a series LLC allows for limited liability protection across all “series” or “cells”, thus protecting each cell from the liability that may arise in another cell. It is commonly used in real estate, where each property can be held in a separate LLC cell, whereas the owner owns just one company. So far, nine states (Delaware, Illinois, Iowa, Nevada, Oklahoma, Tennessee, Texas, Utah, Wisconsin) and Puerto Rico have adopted legislature providing for the creation of series LLC. Although all these states provide for a significant degree of separateness for individual cells (each cell can own its distinct business purpose, assets, liabilities, different managers and members), most do not provide for all attributes of a separate entity. Therefore, cells are ordinarily treated as a single entity for state law purposes (typically, a series LLC would pay just one filing fee).

What do proposed regulations say?

On September 13, 2010, the IRS released proposed regulations governing the federal tax treatment of cells within a series LLCs. The main question that the IRS aimed to clarify was whether for Federal tax purposes each cell of a series LLC should be treated as a separate entity or whether the series LLC (including all its cells) should be treated as a single entity (like under state law).

The proposal is to treat each cell as a separate entity formed under local law, regardless of whether or not the state law treats such cell as a separate legal entity. The tax treatment of each cell will be determined by check-the-box regulations. So, for example, if a series LLC has two cells, one with two partners and the second one with one partner, the first cell will be treated as a partnership for the federal tax purposes, whereas the second cell will be treated as a disregarded entity.

IRS proposed regulations can be found here:

How will the proposed regulations affect series LLC as the entity choice going forward?

Once adopted, the regulations will provide much needed guidance and clarity for the tax payers. At the same time, the regulations add additional complexity for LLC series owners since each cell will be required to file its separate tax returns and annual information statements with the IRS. However, it seems that despite this added complexity, the series LLC will remain an attractive option for those business owners who want to form multiple limited liability companies while paying only one filing fee.