There may be several factors in considering what state is best to form a new entity. In this article, we will consider some of those factors.
The formation and governance of corporations and LLCs are controlled by statutes in all 50 states. Those statutes have been interpreted by the courts in each of the states; which in some cases may be an important factor in determining what state to form the entity. Delaware has long been regarded as a pro-business state because of its favorable corporate statutes and respected Court of Chancery (a court of equity without juries) interpreting and deciding issues involving Delaware entities. Due to the well-reasoned decisions by the Court of Chancery on the key issues facing entrepreneurs, Delaware is often the de facto state of formation as disputes will be handled in a predictable fashion that some argue other state case law cannot match. The familiarity by business lawyers with Delaware law can be the deciding factor when the owners of the entity are from different states.
However, due to the adoption of the LLC Act and the Model Act by a vast number of states, interpreting courts have a large body of case law to rely upon and business lawyers are becoming more familiar with the Acts. Minnesota courts, for instance, frequently rely upon and have adopted decisions by Delaware’s Court of Chancery when deciding issues for the first time. Attorneys can point the deciding court to a foreign jurisdiction’s decision in a factually analogous situation when both states have adopted either the LLC Act or the Model Act. As such, forming an entity in Delaware solely due to the case law would be impulsive without considering other pertinent factors.
When a business will have a single, physical location, it is often prudent to form the entity in that state; thereby avoiding the necessity of a second filing to qualify to do business in the state of the physical location. For example, if a LLC is located in Minnesota, but chooses to organize in Delaware, the LLC would have to file its articles of organization in Delaware and also file with the Minnesota Secretary of State thereby permitting the ‘foreign’ LLC to do business in Minnesota. Forming the entity in the state of its physical location also avoids the necessity of filing annual reports in two separate states, paying franchise taxes in two separate states (where applicable), and submitting to jurisdiction in two separate states rather than one.
The type and goals of the business also affect this analysis. If the business is a family owned business or locally owned business, forming the entity in the state where the owners are located is generally best. The business can retain an attorney familiar with the local statutes who can help the owner(s) navigate the applicable state law. On the other hand, if the business is a joint venture between sophisticated parties in different states, defaulting to formation of the entity in Delaware may be the most agreeable path forward in light of the respect afforded to Delaware’s Court of Chancery and Delaware’s governing statutes.
It is important to consider these factors to ensure that the state you form your business in sets your business up for success.
The material contained herein is provided for informational purposes only and is not legal advice, nor is it a substitute for obtaining legal advice from an attorney. Each situation is unique, and you should not act or rely on any information contained herein without seeking the advice of an experienced attorney. All information contained in links are the property of the linked site.