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.
Sunday, October 24, 2010
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
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.
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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 http://www.law.upenn.edu/academics/institutes/ile/PNYUPapers/2010/Subramanian_Is%20Delaware'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.
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;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.
(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.
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 http://www.law.upenn.edu/academics/institutes/ile/PNYUPapers/2010/Subramanian_Is%20Delaware'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.
Privacy
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.
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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 http://soswy.state.wy.us/FAQ.aspx (last visited Mar. 25, 2010).
22 See Wyoming Department of Revenue, Income Tax, available at http://revenue.state.wy.us/ (last visited Mar. 25, 2010).
23 See Nevada Secretary of State, Forms and Fees, available at http://nvsos.gov/index.aspx?page=127 (last visited Mar. 25, 2010).
24 See Delaware Division of Corporations, How to Form a New Business Entity, available at http://corp.delaware.gov/howtoform.shtml (last visited Mar. 25, 2010).
25 Delaware Division of Revenue, Filing Corporate Income Tax, available at http://revenue.delaware.gov/services/Business_Tax/FilingCIT.shtml (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).
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.
Privacy
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.
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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 http://soswy.state.wy.us/FAQ.aspx (last visited Mar. 25, 2010).
22 See Wyoming Department of Revenue, Income Tax, available at http://revenue.state.wy.us/ (last visited Mar. 25, 2010).
23 See Nevada Secretary of State, Forms and Fees, available at http://nvsos.gov/index.aspx?page=127 (last visited Mar. 25, 2010).
24 See Delaware Division of Corporations, How to Form a New Business Entity, available at http://corp.delaware.gov/howtoform.shtml (last visited Mar. 25, 2010).
25 Delaware Division of Revenue, Filing Corporate Income Tax, available at http://revenue.delaware.gov/services/Business_Tax/FilingCIT.shtml (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).
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