Startup Law 101 - Why not to incorporate your startup in Delaware | Hacker News Reader

Startup Law 101 - Why not to incorporate your startup in Delaware

grellas.com

67 pointsgrellas26 comments

One of the reasons people do Delaware instead of their home state is that nobody knows how psycho their home state incorporation laws are going to be. For instance, several states require you to run ads in the paper announcing your incorporation. At least one --- New York --- allows individual shareholders of a company to be held liable for wage claims by employees!

That's actually not true, about New York. You're referring to the veil-piercing doctrine, and that only applies in very rare situations, such as where the shareholders set up a fake/shell company solely for the purposes of trying to shield themselves for legal liability for torts, taxes, or other legal shenanigans (IOW, a sham company).

Pointers to the very rare situations that applies would be welcome. Good to know (we were a DE company long before I ever heard about the veil piercing thing).

Here's some cites of mine:

http://www.illinoisconstructionlawblog.com/2009/04/articles/...

http://www.wysr-law.com/articles/liabilityprotection.pdf

http://www.eminutesonline.com/why-in-the-world-would-anyone-...

If that's the worst the other states have to offer — a requirement to publicly announce your incorporation and piercing of the corporate veil in exceptional cases — they don't sound very "psycho".

Personal liability for corporate salary claims is psycho.

You might be able to make a case that the institution of the limited liability corporation, as it currently exists in some particular place or time, produces more good than harm; but you cannot make that case by declaring minor variations in the institution to be "psycho".

Hm. Disgruntled former employees in failed New York startups can go after the founders houses. Can I call that "psycho"? Hey, I just did!

I only hire people I know I can pay, and when I have the money to pay them. And if that money dries up then their employment ends as well.

I don't think it's unreasonable for employees to have some claim on the assets of their employer in certain circumstances. It certainly isn't psychotic. Although it might be psychotic to hire people, use their labor to buy yourself a house, then fold the company and claim your assets are beyond reproach.

Nice. So, if I have a house, and I start a company, and something goes wrong, and you lose your job, you think coming after my house is reasonable. Because after all, we shouldn't hire people unless we're sure we'll always be able to pay them. Because that's how business works.

Thankfully, all this really means is that people will incorporate somewhere else where crazy rules like this don't apply.

Respectfully, if something goes wrong you should get rid of your employee before you rack up a huge debt to them in unpaid wages, yes.

I don't think either one is psychotic; maybe the term you're looking for is "psychopathic", which has mostly been replaced with "sociopathic".

Yes, you can certainly call it "psycho", and I don't know if it's actually true in general (I doubt it!) [edit: true that New York corporation shareholders have no limitation of liability for wage claims] but doing so does not succeed in making a case that some other policy is better.

But incorporating in Delaware doesn't make you immune to the laws of your home state. In fact, it allows people who want to sue you to potentially sue you in either state, thus doubling the amount of applicable laws (and possibly forcing you to defend a lawsuit in Delaware, which would be expensive because of travel).

I believe that is very much not the case, but I'd welcome a credible citation to your claim.

I could be wrong, but I got this from the book "Asset Protection" by Adkisson and Riser (well known attorneys in this area):

Under state law, having a registered agent in the state of incorporation creates nexus sufficient to allow the corporation to be sued in that state. This fact alone may affect the decision where to incorporate. A jurisdiction where jury verdicts tend to be very conservative may be preferable to one with a reputation for runaway jury awards. The cost of defending a lawsuit may also be a significant factor in this decision. Defending a lawsuit in the owner's home state will be substantially cheaper than defending the same lawsuit across the continent [or as one person here says, across the world]. This may be a factor in deciding where to incorporate

And you can always be sued in the state in which you are operating. So it seems that you can be sued in both states.

Can anyone with experience say something about this? I would be interested in knowing what kind of difference it makes.

Missed the exchange involving the deleted comment but I want to emphasize that the point of my article is to think it through rather than just being reflexive about Delaware. I am not anti-Delaware. Just don't do Delaware unless it really makes sense.

The reason I used the title "why not to incorporate" in Delaware was just to emphasize that those who read the article will hear the other side of the argument as well as the usual pro-Delaware argument.

We incorporate many of our clients in Delaware when they desire it after understanding the trade-offs and issues. We just don't herd them into it without explanation.

Someone was saying that California almost didn't let them have the share structure they and the VCs had agreed on, and it almost killed the deal.

For the few interested in Delaware vs. Pennsylvania, here is another article from a PA-based firm:

http://www.barley.com/publications/article.cfm?article_ID=21...

Going along with this "Incorporating in Delaware" thread, does anyone have information with the differences between incorporating in Delaware versus Nevada (or other states)?

If you are based in CA you will end up having to pay the same fees and taxes to CA as if you had incorporated here, you have to register as a "foreign corporation" if you have an office or place of business here.

Nevada is favored as a state with no income tax and with stricter privacy protections.

If you actually run your business from Nevada, you can get the benefits of both.

Delaware, in contrast, offers no particular advantages with respect to tax or privacy. If mainly offers what might be called corporate efficiency - it is a well-oiled machine for mature companies wanting to place a premium on control of the company's affairs. It also has a well-developed corporate law enabling public companies who are sued over complex corporate transactions to have excellent and well-developed legal authority around which to plan their legal affairs.

Concerning Nevada, though, if you do not have a true presence there, you get no special tax advantages because you have to pay state income taxes in the state from which you conduct your business. As noted by skmurphy, you would also have to register as a foreign corporation in your home state.

I believe a good number of people go the Nevada route via online services and then simply ignore the rules (i.e., they don't pay state income tax in their home state in the belief that a Nevada corporation does not need to). As a lawyer, of course, I can't advise this even though it may be a common practice. It is plainly illegal and, if it catches up with you, you will significant tax and other troubles.

There are cottage industries set up about the Nevada (and Delaware) incorporation process, mostly consisting of online filing services. They have a motive not to disclose the problems associated with out-of-state filings and often promote misinformation on these issues.

This is not to say that incorporating in Nevada or Delaware is not good for some companies. It is. It just has to be the right situation.

We have had a few folks come to Bootstrappers Breakfasts that went the Nevada route because of encouragement by third parties. At least for CA companies it has always ended in no savings and in some cases worse.

Reply on news.ycombinator.com