

Startup Law 101 - Why not to incorporate your startup in Delaware - grellas
http://www.grellas.com/faq_business_startup_002.html

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tptacek
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!

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kragen
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".

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tptacek
Personal liability for corporate salary claims is psycho.

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kragen
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".

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

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trevelyan
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.

~~~
tptacek
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.

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trevelyan
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.

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

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grellas
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.

~~~
kragen
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.

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dbul
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...](http://www.barley.com/publications/article.cfm?article_ID=216)

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

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grellas
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.

~~~
skmurphy
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.

