If you are looking to incorporate your business, then an important question needs to be answered – which state do you want to incorporate in? For many years, Delaware was the go-to state for businesses looking to incorporate in the United States. For example, 80% of all US IPOS were incorporated in Delaware and 68% of all Fortune 500 companies are incorporated in Delaware. Why? Because Delaware features business-friendly laws, has a solid legal system, and a specialized chancery court to address complex business disputes.
However, there has been a recent shift to other states by many large companies. For example, headlines were made after Dropbox, Meta, and Tesla all opted to re-incorporate outside of Delaware. This has led many business owners to consider other states for incorporation, including Texas and Nevada.
Incorporating Your Business in Texas
Texas made some legal and regulatory changes that make it a more attractive spot for corporate incorporations. For example, Texas established its own specialized business court. In addition, Texas is based within the Fifth Circuit Court of Appeals, which is generally known as one of the most pro-business federal circuits in the country.
Incorporating Your Business in Nevada
Another option worth considering for incorporation is Nevada. Unlike Delaware’s franchise tax – which can range from anywhere between $175 and $200,000 annually – Nevada does not impose such a tax. This makes it more affordable for startups. Another benefit to incorporating in Nevada is that corporations enjoy strong liability protections for corporate officers and the board of directors, shielding them from personal responsibility unless misconduct is intentional, fraudulent, or a clear legal violation.
However, a drawback to incorporating in Nevada is the lack of a specialized corporate court, which Delaware and Texas both have.
In addition, if your company is actually operating in another state (e.g., you’re based in California), you will still have to register there as a foreign corporation—and pay fees/taxes there anyway. So, you lose most of the benefit related to cost savings.
Delaware Remains a Great Option for Incorporation
Due to its well-developed and predictable corporate legal framework, incorporating in Delaware remains one of the best options, especially for privately held startups and private mid-market companies. For example, corporate laws in Texas grant non-waivable inspection rights to minority shareholders with 5% or more in a privately held corporation. In contrast, Delaware requires a “proper purpose” for shareholders to gain such access.
In addition, majority shareholders in a Delaware corporation can use their majority power to draft the company’s governing documents or negotiate stockholder agreements in their favor. These documents set more detailed rules about what information is shared with stockholders and when, rather than simply leaving it to statutory rights in favor of minority shareholders.
Delaware Incorporation: Weighing the Benefits and Alternatives
Despite some companies opting to incorporate elsewhere, Delaware remains one of the best options for incorporating a business. Nevertheless, as time passes, it is certainly worth continuing to assess whether Delaware remains the best option. In addition, it is important to note that incorporation decisions should consider other factors. For example, some states may provide better legal protections in cases such as IP infringement disputes. This is why it makes sense to consult with an experienced business lawyer in Los Angeles prior to making a corporate formation decision.
Have Questions? Contact an Experienced Business Lawyer in Los Angeles
If you have questions about incorporating your business, then now is the time to contact the Hakim Law Group. We are a corporate law firm in Los Angeles geared toward helping business owners tackle complex legal and regulatory matters. Our business law firm was founded on the premise that experience matters. We are laser focused on providing the highest levels of representation in addressing the legal and business challenges facing our clients today, tomorrow, and in the future.
Our team of skilled and highly reputable Los Angeles business attorneys have worked at top-tier international law firms and served as general counsel to major companies. This high level of diverse legal and business experience is paramount to our boutique approach.
For additional information or to schedule an appointment, please contact the attorneys from Hakim Law Group at (310) 993-2203 or visit www.HakimLawGroup.com to learn more.
