Five-minute general counsel: where should I incorporate?

I regularly answer corporate governance questions on LinkedIn.

Where should I incorporate or form my entity?

After you’ve decided that it’s in your interest to form an entity of some kind, the next question is where to form that company. Most people know that Delaware is the 800-pound gorilla in this field. Many have also heard about privacy benefits of being incorporated in Nevada or wonder if they will be taxed differently depending on where the corporation “is.”

Here are the key questions:

  1. Will you be realistically seeking venture financing?
  2. Where are you located?

If the answer to #1 is yes, then your choice is probably limited to Delaware, with some ability to choose California if you’re there. Anywhere else, and you’re just going to have to reincorporate either shortly before or after the financing in any event. Venture capitalists see the selection of consistent corporate law as a way to easily reduce risk. (Here, it’s the risk of unknown laws leading to different results than they expect as well as the cost of finding a lawyer who knows Minnesota law or paying someone to learn it.) They’re right. Almost all good corporate lawyers have some familiarity with Delaware law, and it’s easy to find one if you need one. There are other reasons for choosing Delaware, but these apply to founders as well. My guess is that most of you will not have a lawyer who knows Nevada law easily accessible to you.

If you’re not looking for venture capital financing, and you basically run your business without any significant equity investors, then you should probably just incorporate where your business is located. You won’t pay the costs of being involved in two states, legal advice will be readily available, and those who interact with your business, such as bank lenders, will be familiar with the laws involved.

Sometimes people talk about “governing law.” In some cases they really mean state of incorporation, but some people mean the “choice of law” governing their contracts. It’s possible, through a “choice of law clause, to select a particular state’s law to apply to an agreement. Your goal is certainty of enforcement, meaning that a court will enforce a reasonable agreement as written rather than decide to “adjust” it for social policy reasons. Contracts, by their very purpose, are designed to supersede default state laws.

NY law is common in large commercial contracts, moreso than other states. You may, however, be likely to just choose local courts and local law if NY is inconvenient.

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  1. […] I’m onto a new startup idea.  How much would you charge to incorporate?  Do you have any advice as to where to incorporate? […]

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