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.

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