Delaware: Jurisdiction of Choice for Mobile Generation
According to census figures, between 1995 and 2000, 120 million people over age 5—almost half the US population—moved to a new residence. Of the 120 million people who changed residences during that period, 8.4% moved to a different state. This high rate of interstate mobility has important implications when it comes to choosing the state in which to incorporate your business.
Let’s say you’re a writer who lives in New York, so you decide to incorporate your business in New York. A few years later, your husband’s company transfers him to California. No problem, you think: have computer, will travel. So, you move to California and set up shop there.
Not so fast! In order to operate in California a foreign (i.e., out-of-state) corporation must qualify to do business in that state. When that happens, our hypothetical company becomes obligated to pay franchise taxes and file tax returns in both California and New York. Now that transfer from the chilly northeast to sunny California isn’t looking so hot. What to do, what to do?
Although many believe that it’s possible to reincorporate in California (because that concept is addressed in the tax code), there is no simple transaction to change the jurisdiction in which a corporation of formation. To change the jurisdiction of formation, first a new California corporation must be formed. Then, the New York corporation must be merged into the California corporation. That’s a ton of work (not to mention legal fees)!
Luckily there’s a great alternative if you’re deciding where to incorporate. Instead of forming a corporation in the state where you will be conducting business, incorporate your business in Delaware, and then qualify the corporation to do business wherever the principal place of business is located (in our example, the original place of business was New York). Then, when the corporation moves to a different state, it can qualify to do business in the new state (California in our example) and surrender its home state qualification. That’s it: a very inexpensive and simple solution.
This approach does involve a little bit of extra expense, even for a corporation that is still doing business in its original home state, because the corporation has to (1) pay Delaware’s very small annual fee (about ($60/ year)and (2) maintain an agent for service of process in Delaware. However, the marginal additional cost gives the corporation an enormous amount of flexibility where there is any possibility of a move to another state one day.
By the way, why not Nevada? Because contrary to popular myth, Nevada is not cheap. The annual fees in Nevada are quite a bit more than Delaware.
Although there are a lot of good reasons to incorporate in Delaware, many of the benefits of Delaware incorporation are applicable primarily to larger corporations. The ability to easily and inexpensively start doing business in a new state, on the other hand, is a significant benefit for small corporations.
[...] Over the years, there have been a lot of schemes designed to conjure up identity protection, but these schemes have been mostly hocus pocus. Many clients have asked about using “nominees”, which are essentially hired guns who will act as a corporation’s officers or as the manager of the LLC. However, these schemes are expensive, and wrought with risk associated with appointing a complete stranger as the CEO of your company. Using Delaware for anonymity purposes carries none of these risks. Delaware has a sophisticated judicial system, and is a preferred jurisdiction for the flexibility and mobility it provides to those who form businesses there. See, http://www.eminutesonline.com/what-is-the-benefit-of-incorporating-in-delaware-watch-video/; http://www.eminutesonline.com/delaware-jurisdiction-of-choice-for-mobile-generation/. [...]
[...] Small business owners are fans of Delaware for an altogether different reason – mobility. See http://www.eminutesonline.com/delaware-jurisdiction-of-choice-for-mobile-generation/ Let’s say your spouse can’t stand the New York winters and wants to move to Florida. In that [...]
[...] Basically, California is trying to exert its public policies (most designed to protect minority shareholders) on corporations that are doing business in California even if the corporation has attempted to avoid California law by incorporating elsewhere. If you want to shop around for the best corporate law and do business in California, beware that California law may trump the law of the home state of a corporation. To learn more about the one reason that corporations are nonetheless well served to incorporate in Delaware – mobility, watch “What is the benefit of incorporating in Delaware”, http://www.eminutesonline.com/what-is-the-benefit-of-incorporating-in-delaware-watch-video/, or read “Delaware: Jurisdiction of Choice for a Mobile Generation”, http://www.eminutesonline.com/delaware-jurisdiction-of-choice-for-mobile-generation/. [...]
Thank you. That’s helpful.
A corporation’s home state (i.e., the jurisdication where the corporation is formed) remains fixed. The corporation must then qualify to do business in any additional jurisdictions where it is actually doing business. Isolated transactions in a state do not require a corporation to qualify to do business; and simply having a single client in a state does not necessarily require a corporation to qualify to do business. When a corporation is regularly servicing clients in multiple states, it would qualify to do business in each state. The question is based on the particular facts of the situation and turns entirely on the nature of the business activity.
The question is what the Delaware LLC is actually doing in each state. By itself, simply traveling to a state, would not constitute “doing business”. Every state in the country requires a foreign LLC or corporation to “qualify” to do business in a state where it is “doing business”. So what constitutes doing business? It’s defined differently from state to state, but states tend to define it broadly and ambiguously. In California, for example, doing business is defined as “entering into repeated and successive transactions”. What does that mean? Most states, including California and New York, provide lists of “safe harbors” that do not constitute doing business (e.g., holding a board meeting, soliciting orders). In other words, we know much more about what is NOT doing business than what IS doing business.
Would a 1-person LLC registered in Delaware have to register as a foreign entity in every state he/she travels to? Even if the business is only online services, I assume the person is considered the “principle place of business,” correct?
What is the threshold to determine when you have to register as a foreign entity as one moves around?
Thanks.
Yes, the same logic would apply exactly to a LLC. Like a corporation, a LLC would be obligated (forever) to pay franchise tax and file a tax return in the jurisdiction where it is formed. Forming in DE and qualifying in the jurisdiction where business would be conducted would provide substantial flexibility.
Might the same logic apply to an LLC? What would the differences be?
[...] Delaware: Great Choice for Mobile Generation Delaware has a wonderful benefit for most small businesses – mobility. Forming in Delaware and qualifying to do business in the state where you presently live enables the entrepreneur to move to a new state without being tied to the old state (e.g., obligated to pay franchise taxes and file tax returns) forever. When it’s time to move, you can surrender the right to do business wherever you are living and qualify to do business in the new state when you set up shop there. Check out an article I wrote about this Delaware: Jurisdiction of Choice for Mobile Generation : eMinutes Online [...]