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 http://www.sbecouncil.org/uploads/sbsi%202008.pdf (last visited Mar. 25, 2010).
4 Delaware Division of Corporations 2008 Annual Report (June 29, 2009), available at http://corp.delaware.gov/2008AR.pdf (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 http://nvsos.gov/index.aspx?page=147 (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 http://soswy.state.wy.us/Forms/Publications/ChoiceIsYours.pdf (Apr. 2009) (last visited Mar. 25, 2010).