I’m starting to get lots of emails asking business law questions, so I thought I’d start a weekly column where I answer one. Here is our first question.
Katie from Cincinnati, Ohio asks,
“Why are there so many corporations from Delaware?”
Dear Katie: Before you can set up a company, you have to decide where you are going to set it up. Many companies set up in Delaware and Nevada. There are two reasons for that. First, states like Delaware have created an industry in their state out of providing a place for companies to organize. Delaware makes it easy, keeps the fees relatively low and maintains a very good infrastructure to handle organization.
Second, Delaware law and courts are exceptional. The statutes are well written and relatively clear. These laws favor management, enabling enormous flexibility and, occasionally, some mayhem. The Delaware courts are highly regarded (not something you can say about all state courts), stocked with sober, smart judges and sensible procedures. Because of these things, lawyers and academics have an opportunity and a need to study Delaware statutes and cases, creating a snowball effect of incorporation. Incorporating in Delaware is a little like wearing an Armani suit – it shows you’ve got some savvy and you mean business.
So, does that mean that you should always set up your entity in Delaware? No, not necessarily. If you do not live in Delaware, there are drawbacks to incorporating there. If you do business in a limited liability entity, you have to incorporate in the state you do business in and you have to register your company with every other state where you do business. This registration is usually called “Certificate of Authority” or “getting qualified.” Like your incorporation, you have to re-up this registration every year with a report and a payment. Incorporating in Delaware will not relieve you of any obligations you have to pay fees or taxes in the state in which you have business activities. So, if you just need an uncomplicated organization, you may just want to file in your own state where you live and where you will locate your office.
I hope that is helpful. Please keep those questions coming in.