7 ms·

Startup Law 101 - Why not to incorporate your startup in Delaware

67 points by grellas 17y ago

davidblair 17y ago
Can anyone with experience say something about this? I would be interested in knowing what kind of difference it makes.
- deleted 17y ago
  [deleted]
  - smanek 17y ago
    Your anecdote is a reason why I shouldn't incorporate in California. It isn't a reason why I should incorporate in Delaware.
    - deleted 17y ago
      [deleted]
  - daeken 17y ago
    I agree with your sentiment overall, but "fucking moron" takes it a bit too far. Most entrepreneurs make far bigger mistakes without it having a significant impact. In most cases, where you incorporate has very little impact down the line, and when it does, you probably should've been taking advice from a business lawyer in the first place.
    - fatdog789 17y ago
      State of incorporation always affects the bottom line, immediately. It determines what legal requirements you must satisfy in organization and funding your business, including who your investors can be. It determines what taxes you pay, what tax credits you may qualify for, whether you can qualify for special small business contracts that many state governments restrict to small businesses within their own state. It also plays a large role in whether banks will provide business loans: many banks will not loan money to small businesses that operate in the bank's state but which are headquartered in another.
- grellas 17y ago
  Missed the exchange involving the deleted comment but I want to emphasize that the point of my article is to think it through rather than just being reflexive about Delaware. I am not anti-Delaware. Just don't do Delaware unless it really makes sense. The reason I used the title "why not to incorporate" in Delaware was just to emphasize that those who read the article will hear the other side of the argument as well as the usual pro-Delaware argument. We incorporate many of our clients in Delaware when they desire it after understanding the trade-offs and issues. We just don't herd them into it without explanation.
  - kragen 17y ago
    Someone was saying that California almost didn't let them have the share structure they and the VCs had agreed on, and it almost killed the deal.
tptacek 17y ago
One of the reasons people do Delaware instead of their home state is that nobody knows how psycho their home state incorporation laws are going to be. For instance, several states require you to run ads in the paper announcing your incorporation. At least one --- New York --- allows individual shareholders of a company to be held liable for wage claims by employees!
- fatdog789 17y ago
  That's actually not true, about New York. You're referring to the veil-piercing doctrine, and that only applies in very rare situations, such as where the shareholders set up a fake/shell company solely for the purposes of trying to shield themselves for legal liability for torts, taxes, or other legal shenanigans (IOW, a sham company).
  - tptacek 17y ago
    Pointers to the very rare situations that applies would be welcome. Good to know (we were a DE company long before I ever heard about the veil piercing thing). Here's some cites of mine: http://www.illinoisconstructionlawblog.com/2009/04/articles/could-you-be-held-liable-for-judgments-against-your-corporation/ http://www.illinoisconstructionlawblog.com/2009/04/articles/... http://www.wysr-law.com/articles/liabilityprotection.pdf http://www.wysr-law.com/articles/liabilityprotection.pdf http://www.eminutesonline.com/why-in-the-world-would-anyone-with-employees-incorporate-in-new-york/ http://www.eminutesonline.com/why-in-the-world-would-anyone-...
- kragen 17y ago
  If that's the worst the other states have to offer — a requirement to publicly announce your incorporation and piercing of the corporate veil in exceptional cases — they don't sound very "psycho".
  - tptacek 17y ago
    Personal liability for corporate salary claims is psycho.
dbul 17y ago
For the few interested in Delaware vs. Pennsylvania, here is another article from a PA-based firm: http://www.barley.com/publications/article.cfm?article_ID=216 http://www.barley.com/publications/article.cfm?article_ID=21...
daemin 17y ago
Going along with this "Incorporating in Delaware" thread, does anyone have information with the differences between incorporating in Delaware versus Nevada (or other states)?
- skmurphy 17y ago
  If you are based in CA you will end up having to pay the same fees and taxes to CA as if you had incorporated here, you have to register as a "foreign corporation" if you have an office or place of business here.
- grellas 17y ago
  Nevada is favored as a state with no income tax and with stricter privacy protections. If you actually run your business from Nevada, you can get the benefits of both. Delaware, in contrast, offers no particular advantages with respect to tax or privacy. If mainly offers what might be called corporate efficiency - it is a well-oiled machine for mature companies wanting to place a premium on control of the company's affairs. It also has a well-developed corporate law enabling public companies who are sued over complex corporate transactions to have excellent and well-developed legal authority around which to plan their legal affairs. Concerning Nevada, though, if you do not have a true presence there, you get no special tax advantages because you have to pay state income taxes in the state from which you conduct your business. As noted by skmurphy, you would also have to register as a foreign corporation in your home state. I believe a good number of people go the Nevada route via online services and then simply ignore the rules (i.e., they don't pay state income tax in their home state in the belief that a Nevada corporation does not need to). As a lawyer, of course, I can't advise this even though it may be a common practice. It is plainly illegal and, if it catches up with you, you will significant tax and other troubles. There are cottage industries set up about the Nevada (and Delaware) incorporation process, mostly consisting of online filing services. They have a motive not to disclose the problems associated with out-of-state filings and often promote misinformation on these issues. This is not to say that incorporating in Nevada or Delaware is not good for some companies. It is. It just has to be the right situation.
  - skmurphy 17y ago

67 points by grellas 17y ago

davidblair 17y ago

Can anyone with experience say something about this? I would be interested in knowing what kind of difference it makes.

deleted 17y ago
[deleted]
- smanek 17y ago
  Your anecdote is a reason why I shouldn't incorporate in California. It isn't a reason why I should incorporate in Delaware.
  - deleted 17y ago
    [deleted]
- daeken 17y ago
  I agree with your sentiment overall, but "fucking moron" takes it a bit too far. Most entrepreneurs make far bigger mistakes without it having a significant impact. In most cases, where you incorporate has very little impact down the line, and when it does, you probably should've been taking advice from a business lawyer in the first place.
  - fatdog789 17y ago
    State of incorporation always affects the bottom line, immediately. It determines what legal requirements you must satisfy in organization and funding your business, including who your investors can be. It determines what taxes you pay, what tax credits you may qualify for, whether you can qualify for special small business contracts that many state governments restrict to small businesses within their own state. It also plays a large role in whether banks will provide business loans: many banks will not loan money to small businesses that operate in the bank's state but which are headquartered in another.
grellas 17y ago
Missed the exchange involving the deleted comment but I want to emphasize that the point of my article is to think it through rather than just being reflexive about Delaware. I am not anti-Delaware. Just don't do Delaware unless it really makes sense. The reason I used the title "why not to incorporate" in Delaware was just to emphasize that those who read the article will hear the other side of the argument as well as the usual pro-Delaware argument. We incorporate many of our clients in Delaware when they desire it after understanding the trade-offs and issues. We just don't herd them into it without explanation.
- kragen 17y ago
  Someone was saying that California almost didn't let them have the share structure they and the VCs had agreed on, and it almost killed the deal.

tptacek 17y ago

One of the reasons people do Delaware instead of their home state is that nobody knows how psycho their home state incorporation laws are going to be. For instance, several states require you to run ads in the paper announcing your incorporation. At least one --- New York --- allows individual shareholders of a company to be held liable for wage claims by employees!

fatdog789 17y ago
That's actually not true, about New York. You're referring to the veil-piercing doctrine, and that only applies in very rare situations, such as where the shareholders set up a fake/shell company solely for the purposes of trying to shield themselves for legal liability for torts, taxes, or other legal shenanigans (IOW, a sham company).
- tptacek 17y ago
  Pointers to the very rare situations that applies would be welcome. Good to know (we were a DE company long before I ever heard about the veil piercing thing). Here's some cites of mine: http://www.illinoisconstructionlawblog.com/2009/04/articles/could-you-be-held-liable-for-judgments-against-your-corporation/ http://www.illinoisconstructionlawblog.com/2009/04/articles/... http://www.wysr-law.com/articles/liabilityprotection.pdf http://www.wysr-law.com/articles/liabilityprotection.pdf http://www.eminutesonline.com/why-in-the-world-would-anyone-with-employees-incorporate-in-new-york/ http://www.eminutesonline.com/why-in-the-world-would-anyone-...
kragen 17y ago
If that's the worst the other states have to offer — a requirement to publicly announce your incorporation and piercing of the corporate veil in exceptional cases — they don't sound very "psycho".
- tptacek 17y ago
  Personal liability for corporate salary claims is psycho.

dbul 17y ago

For the few interested in Delaware vs. Pennsylvania, here is another article from a PA-based firm: http://www.barley.com/publications/article.cfm?article_ID=216 http://www.barley.com/publications/article.cfm?article_ID=21...

daemin 17y ago

Going along with this "Incorporating in Delaware" thread, does anyone have information with the differences between incorporating in Delaware versus Nevada (or other states)?

skmurphy 17y ago
If you are based in CA you will end up having to pay the same fees and taxes to CA as if you had incorporated here, you have to register as a "foreign corporation" if you have an office or place of business here.
grellas 17y ago
Nevada is favored as a state with no income tax and with stricter privacy protections. If you actually run your business from Nevada, you can get the benefits of both. Delaware, in contrast, offers no particular advantages with respect to tax or privacy. If mainly offers what might be called corporate efficiency - it is a well-oiled machine for mature companies wanting to place a premium on control of the company's affairs. It also has a well-developed corporate law enabling public companies who are sued over complex corporate transactions to have excellent and well-developed legal authority around which to plan their legal affairs. Concerning Nevada, though, if you do not have a true presence there, you get no special tax advantages because you have to pay state income taxes in the state from which you conduct your business. As noted by skmurphy, you would also have to register as a foreign corporation in your home state. I believe a good number of people go the Nevada route via online services and then simply ignore the rules (i.e., they don't pay state income tax in their home state in the belief that a Nevada corporation does not need to). As a lawyer, of course, I can't advise this even though it may be a common practice. It is plainly illegal and, if it catches up with you, you will significant tax and other troubles. There are cottage industries set up about the Nevada (and Delaware) incorporation process, mostly consisting of online filing services. They have a motive not to disclose the problems associated with out-of-state filings and often promote misinformation on these issues. This is not to say that incorporating in Nevada or Delaware is not good for some companies. It is. It just has to be the right situation.
- skmurphy 17y ago