WHERE SHOULD I ORGANIZE / SET UP / MARRY MY CORPORATION OR LLC?
Choosing which state in which to setup your LLC or corporation is like dating 50 people at once and being forced to marry one. As we all know, choosing a mate for life is simply an unscientific affair. And with choosing between states as opposed to mates, there is still the usual sorting through quirks annoyances and whether or not a state may simply look ugly the morning after the ceremony. Further confusing the process us the maze of state idiosyncrasies, from unique fees to unique common law and statutory frameworks.
There are however some major criteria one can use to cut through the din if confusing choices.
TAX QUIRKS
First and foremost does the state have quirky or imposing tax rules? For example some states charge special franchise fees that are either exorbitant or difficult to navigate. Sometimes the taxes are "hidden". In New York there is a little glitch when it comes to filing taxes for a LLC. The state charges a fifty dollar fee for each member of the LLC. So for an LLC that has many members you are looking at a significant fee. Even worse for an llc that has allot of passive members that came on board through some kind of private offering, it can mean thousands of dollars in tax filing fees. Hence this is a consideration for an operation that is really seeking to raise funds for deployment overseas. In that case, the LLC really doesn't have a state footprint and can elect to be formed in the more tax friendly jurisdiction.
MINORITY SHAREHOLDER’S
Another consideration is the state's approach to minority interest holders' rights. Some states such as New York actually have a separate minority shareholders doctrine to protect against abuse by the majority shareholder. The presence of this doctrine can cut both ways in terms of the parties' interests. Therefore it is another important factor to keep in mind when selecting an entity. For example one may ask whether they represent a minority investor stake or a dominant controlling or management stake when approaching this aspect of the equation. Delaware is more friendly to the majority position than NY is (which is why it is often a choice for large publicly traded corporations).
STICKING TO YOUR STATE
Another overriding question is the location, size and scope of your operation. It is generally best for small companies to organize in their home state. This is especially true where the “footprint” of the company (i.e., office and employee location, source of income, etc.) is limited to that state. Secondly, small companies often do not require complex financing and are really partnerships at heart, shrinking the allure of a Delaware state company. When organizing an entity in a foreign state (e.g., your business “footprint” is in NY but you organize an LLC in DE) you will likely have to pay redundant fees for a variety of things and negate any cost savings. For example, though NY has a costly “publication” requirement, if you form an LLC in DE and want a bank account in NY, you will have to satisfy NY’s “foreign LLC” requirements, meaning you will have to pay the publication fees anyway. Also, there tends to be greater variation between state corporation laws than between state LLC law, further negating any interstate advantage.
There are however some major criteria one can use to cut through the din if confusing choices.
TAX QUIRKS
First and foremost does the state have quirky or imposing tax rules? For example some states charge special franchise fees that are either exorbitant or difficult to navigate. Sometimes the taxes are "hidden". In New York there is a little glitch when it comes to filing taxes for a LLC. The state charges a fifty dollar fee for each member of the LLC. So for an LLC that has many members you are looking at a significant fee. Even worse for an llc that has allot of passive members that came on board through some kind of private offering, it can mean thousands of dollars in tax filing fees. Hence this is a consideration for an operation that is really seeking to raise funds for deployment overseas. In that case, the LLC really doesn't have a state footprint and can elect to be formed in the more tax friendly jurisdiction.
MINORITY SHAREHOLDER’S
Another consideration is the state's approach to minority interest holders' rights. Some states such as New York actually have a separate minority shareholders doctrine to protect against abuse by the majority shareholder. The presence of this doctrine can cut both ways in terms of the parties' interests. Therefore it is another important factor to keep in mind when selecting an entity. For example one may ask whether they represent a minority investor stake or a dominant controlling or management stake when approaching this aspect of the equation. Delaware is more friendly to the majority position than NY is (which is why it is often a choice for large publicly traded corporations).
STICKING TO YOUR STATE
Another overriding question is the location, size and scope of your operation. It is generally best for small companies to organize in their home state. This is especially true where the “footprint” of the company (i.e., office and employee location, source of income, etc.) is limited to that state. Secondly, small companies often do not require complex financing and are really partnerships at heart, shrinking the allure of a Delaware state company. When organizing an entity in a foreign state (e.g., your business “footprint” is in NY but you organize an LLC in DE) you will likely have to pay redundant fees for a variety of things and negate any cost savings. For example, though NY has a costly “publication” requirement, if you form an LLC in DE and want a bank account in NY, you will have to satisfy NY’s “foreign LLC” requirements, meaning you will have to pay the publication fees anyway. Also, there tends to be greater variation between state corporation laws than between state LLC law, further negating any interstate advantage.
posted by Kaiser at 9:42 AM
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