A United States business owner may organize his company under the law of the state in which he resides or under the law of any other state. There are certain states that have attractive elements in their business law statutes.
Many would place Delaware at the top of the list. Delaware has a well-respected, progressive body of corporate and business entity law and has likely addressed every category of business dispute within its court system. For businesses seeking to minimize tax liability, Nevada and Wyoming, which have no corporate taxes, might be attractive. In addition, both Nevada and Wyoming allow shareholders to remain anonymous and, like Delaware, have a corporation-friendly court system.
Nevertheless, sometimes, there's just no place like home . . .
Despite the apparent advantages of other states, for small privately-held businesses, I tend to favor organizing in the state in which the owners reside or the state in which the company’s primary office is located. Even if you organize in another state, you must still register as a foreign entity in the state in which you do business. This requires filing the same paperwork and paying the same fees as you would file and pay had you simply organized under the laws of your home state.
Also, while the law of the other state will apply to the internal structure of your company, the law of the state in which you’re located will likely apply to your relationships with outside parties. In other words, for a company organized in Delaware and based in New York, an argument among the company's owners will be resolved pursuant to Delaware law. However, if a customer sues the company for negligence, New York law is likely to govern the negligence lawsuit.
For small privately-held businesses, the benefits offered by other states' laws often do not justify the added expense and paperwork required for compliance with the laws of two states (i.e., your state of organization and the state in which you’re located). Obviously, there are exceptions. Organization in Delaware or in another state with favorable business laws may be worthwhile for your privately held business if . . .
- the company has multiple owners who reside in several different states
- you plan to pursue venture capital financing
- you plan to take the company public
- the company has multiple classes of stock or membership interests
- there is a specific provision in the other state’s laws that would be especially advantageous to your business
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