5 ms·

Here's something I'm curious about. First off, I understand that few of you are lawyers, and any of you who are aren't being paid by me so none of this constitu

Here's something I'm curious about. First off, I understand that few of you are lawyers, and any of you who are aren't being paid by me so none of this constitutes legal advice. :) I'd certainly talk to a lawyer before acting on it in any case, I just can't wrap my head around how Delaware is such an advantage. I read that Delaware C corps/LLCs are the way to go because they're inexpensive. I'm in Texas. It looks like Texas would consider a Delaware entity as foreign, and require me to pay additional fees to do business in Texas. So that would appear to nullify any cost savings, since (IIRC) that fee was larger than registering the entity here when I last checked (I.e. I could just register a Texas LLC for $300 vs. registering somewhere else and paying a larger fee to transact business here.) Is that just another in Texas' long and growing list of stupid things? Or, if your business is internet-based, are you not considered to be doing business in Texas in the sense that a more traditional corporation would? Not sure how that'd make sense, but... It looks like, according to BOC 9.251, transacting interstate commerce doesn't automatically qualify as doing business, so if you might argue that a majority of your transactions are interstate by virtue of you being internet-based, I wonder if that makes a difference? So I'm wondering if this is a way that Texas is strict that other states aren't because, as I understand it, other states charge significantly more for LLC filing? http://www.sos.state.tx.us/corp/foreign_outofstate.shtml http://www.sos.state.tx.us/corp/foreign_outofstate.shtml Thanks.

pdq 10y ago
You are correct. Texas (as do most other states) penalizes foreign corporations as an incentive to file as a Texas corporation/LLC. Yes on your second point as well -- you can delay this while developing the business. Although if you have revenue or Texas payroll (or outside investment), you definitely need to file as a foreign entity. The reason behind the popularity of Delaware Corporations is the Chancery Court system, which is unique in the US: https://www.youtube.com/watch?v=0qIEvUYzwrc https://www.youtube.com/watch?v=0qIEvUYzwrc
piker 10y ago
Generally the purpose of registering a foreign corporation in a state is to have access to the courts of that state if it needs to, e.g., sue a vendor. You're almost always going to be able to use your home state's court (although jurisdiction may be harder to obtain) or a federal court depending on the facts. Also, registering in a foreign state serves as somewhat of a soft "trademark" in that another entity of the same name cannot be formed in that state. In short, foreign registration may not actually be required under many circumstances. If it is, you can always incorporate at home and re-domicile concurrent with the closing of a funding round on the investor's dime.
pdshrader 10y ago
Startup/Venture Capital lawyer here (but not your lawyer). The foreign qualification requirement is fairly universal - California has it, too. There are occasions when incorporating in a different state can be beneficial, but generally if you're raising VC $$, VCs are going to want to invest in a Delaware C-corp. Delaware is NOT the cheapest, but it is extremely flexible (both legally speaking and administratively speaking - there are very few states where you can pay a premium and find someone to come in on a holiday/weekend to file your restated charter to close a big deal), and it has a very well-established body of law. That means everyone knows what to expect. Think of it like a really great WYSIWYG editor, whereas other states' laws can be like coding a site in a brand new alpha release programming language.
- jawns 10y ago
  > it has a very well-established body of law. That means everyone knows what to expect Delawarean here! Having spent some time as a writer/reporter learning about the Delaware incorporation process, I've found that this is one of the biggest reasons why companies/investors continue to prefer Delaware. Wyoming and Nevada are also known as business-friendly states in which to incorporate, but no other state has the wealth of case law that Delaware has.
  - pdshrader 10y ago
    True, but most people don't actually know the practical effects of having an established body of law. Mostly because it's difficult to compare Delaware with 49 other different sets of rules in a digestible format. Here's one example of the difference between CA and DE: California, as a baseline, generally requires class votes on amendments to charters. Delaware, as a baseline, generally requires only a majority of all capital stock to vote in favor of an amendment to the charter. This means that in California, the holders of common stock (or the holders of a prior venture round stock) could potentially block a future round of financing, which most VCs would say is not a great result.
    - toast0 10y ago
      This gets murkier though because California law declares corporations to be 'quasi-California corporations' if they meet certain requirements such as having principle offices in the state, and then declares that some California corporate law rules apply. Case law isn't clear, so often class votes are held even if not required.
marme 10y ago
the big reason has to do with taxes. Many states have state corp taxes, delaware does not. If you only register in texas it means that you must pay corp taxes for all profits made worldwide, if you register in delaware you only pay state corp taxes for the business done in those states. If you do 100% of your business in one state there is no reason to register out of state
ci5er 10y ago
To user piker's point, most corporate attorneys are licensed to practice where they are and in Delaware, which has become sort of a default, because of the clarity of their regs and case-law. The deal seems to be: "Let's do business under some rules that both of us understand". This Central Texas' startup attorney's blog is worth flipping through - and this article speaks to your specific concern: - http://siliconhillslawyer.com/2013/04/16/should-i-form-my-austin-startup-in-texas-or-delaware/ Net-net: You only need to worry about it if you are raising outside money. And it isn't any particular "Texas is stupid" kind of thing. (Many states are much worse...)
parkaboy 10y ago
SV VC-funded startup that began in TX as an LLC and transitioned to DE C Corp. Working fine for us (so far). We started as a TX LLC pre-funding, which worked fine and was easy for our purposes. Only 3 employees (2x 50/50 co-founders paying engineer out of pocket 50/50). When we started getting term sheets, the big law firms for general counsel were willing to take us on under the expectation we pay them back until we closed our Seed Round. They helped to structure the DE C-Corp, transfer everything to the LLC, and directed me on all the paperwork that needed to be filed. Winding down the LLC was easy, but you just need a controller/accountant to help you close the books properly and file the paperwork. If you intend to go this route, my only major recommendation is to pick a name that is different/slightly different than what you ultimately want the company to be called. We ran into naming conflicts, which was an unnecessary PITA. Second side-piece of advice: ask the general counsel to give you a fixed-cap cost for closing the round. We got stuck in some licensing negotiations as part of the close, which made things way more expensive than they should have been.

pdq 10y ago

You are correct. Texas (as do most other states) penalizes foreign corporations as an incentive to file as a Texas corporation/LLC. Yes on your second point as well -- you can delay this while developing the business. Although if you have revenue or Texas payroll (or outside investment), you definitely need to file as a foreign entity. The reason behind the popularity of Delaware Corporations is the Chancery Court system, which is unique in the US: https://www.youtube.com/watch?v=0qIEvUYzwrc https://www.youtube.com/watch?v=0qIEvUYzwrc

piker 10y ago

Generally the purpose of registering a foreign corporation in a state is to have access to the courts of that state if it needs to, e.g., sue a vendor. You're almost always going to be able to use your home state's court (although jurisdiction may be harder to obtain) or a federal court depending on the facts. Also, registering in a foreign state serves as somewhat of a soft "trademark" in that another entity of the same name cannot be formed in that state. In short, foreign registration may not actually be required under many circumstances. If it is, you can always incorporate at home and re-domicile concurrent with the closing of a funding round on the investor's dime.

pdshrader 10y ago

Startup/Venture Capital lawyer here (but not your lawyer). The foreign qualification requirement is fairly universal - California has it, too. There are occasions when incorporating in a different state can be beneficial, but generally if you're raising VC $$, VCs are going to want to invest in a Delaware C-corp. Delaware is NOT the cheapest, but it is extremely flexible (both legally speaking and administratively speaking - there are very few states where you can pay a premium and find someone to come in on a holiday/weekend to file your restated charter to close a big deal), and it has a very well-established body of law. That means everyone knows what to expect. Think of it like a really great WYSIWYG editor, whereas other states' laws can be like coding a site in a brand new alpha release programming language.

jawns 10y ago
> it has a very well-established body of law. That means everyone knows what to expect Delawarean here! Having spent some time as a writer/reporter learning about the Delaware incorporation process, I've found that this is one of the biggest reasons why companies/investors continue to prefer Delaware. Wyoming and Nevada are also known as business-friendly states in which to incorporate, but no other state has the wealth of case law that Delaware has.
- pdshrader 10y ago
  True, but most people don't actually know the practical effects of having an established body of law. Mostly because it's difficult to compare Delaware with 49 other different sets of rules in a digestible format. Here's one example of the difference between CA and DE: California, as a baseline, generally requires class votes on amendments to charters. Delaware, as a baseline, generally requires only a majority of all capital stock to vote in favor of an amendment to the charter. This means that in California, the holders of common stock (or the holders of a prior venture round stock) could potentially block a future round of financing, which most VCs would say is not a great result.
  - toast0 10y ago
    This gets murkier though because California law declares corporations to be 'quasi-California corporations' if they meet certain requirements such as having principle offices in the state, and then declares that some California corporate law rules apply. Case law isn't clear, so often class votes are held even if not required.

marme 10y ago

the big reason has to do with taxes. Many states have state corp taxes, delaware does not. If you only register in texas it means that you must pay corp taxes for all profits made worldwide, if you register in delaware you only pay state corp taxes for the business done in those states. If you do 100% of your business in one state there is no reason to register out of state

ci5er 10y ago

To user piker's point, most corporate attorneys are licensed to practice where they are and in Delaware, which has become sort of a default, because of the clarity of their regs and case-law. The deal seems to be: "Let's do business under some rules that both of us understand". This Central Texas' startup attorney's blog is worth flipping through - and this article speaks to your specific concern: - http://siliconhillslawyer.com/2013/04/16/should-i-form-my-austin-startup-in-texas-or-delaware/ Net-net: You only need to worry about it if you are raising outside money. And it isn't any particular "Texas is stupid" kind of thing. (Many states are much worse...)

parkaboy 10y ago

SV VC-funded startup that began in TX as an LLC and transitioned to DE C Corp. Working fine for us (so far). We started as a TX LLC pre-funding, which worked fine and was easy for our purposes. Only 3 employees (2x 50/50 co-founders paying engineer out of pocket 50/50). When we started getting term sheets, the big law firms for general counsel were willing to take us on under the expectation we pay them back until we closed our Seed Round. They helped to structure the DE C-Corp, transfer everything to the LLC, and directed me on all the paperwork that needed to be filed. Winding down the LLC was easy, but you just need a controller/accountant to help you close the books properly and file the paperwork. If you intend to go this route, my only major recommendation is to pick a name that is different/slightly different than what you ultimately want the company to be called. We ran into naming conflicts, which was an unnecessary PITA. Second side-piece of advice: ask the general counsel to give you a fixed-cap cost for closing the round. We got stuck in some licensing negotiations as part of the close, which made things way more expensive than they should have been.