Choosing The Right Jurisdiction For Your Clients

Here are the key considerations when advising a client on the state in which it should incorporate.

Whether you’re Biglaw or SmallLaw, in corporate law, clients are going to be looking to you for guidance on where to incorporate. Maybe they don’t know they’re looking to you for guidance; maybe they think they have it all figured out and it’s going to be Delaware or Tennessee or Guam or Guernsey (yes, there is such a place as Guernsey, and trust me, a lot of people do incorporate there).  It’s up to you to say, “Look, I’m the one who went to law school, and I say it’s better if you incorporate in Jersey instead of New Jersey, so that’s what we’re going to do.”

And why might you tell a client it’s better to incorporate in Jersey instead of New Jersey? Well, I have to save that specific question for another column, but here are the key considerations when advising a client on the state in which it should incorporate.

First, let’s talk about Delaware. Way back in the early 1900s, New Jersey was the premier place to incorporate, since it offered a flexible corporate law that gave companies a lot of leeway to set in place a structure that worked best for them. Then Woodrow Wilson became governor of the state and put the kibosh on that, putting in place a more strict corporate governance framework. Delaware saw an opportunity and decided to emulate the old New Jersey corporate law regime, and the rest is history.

Delaware likes the $1 billion it gets each year from corporate franchise taxes. It wants to keep getting this. So, in general, Delaware has the most well-run corporation division, with the most responsive staff. They will get on the phone with you and talk things out. (They don’t ghost, unlike some other states.)

As such, there is no state as fast as Delaware. If your client absolutely, positively needs the company formed today, your best bet is Delaware. Delaware offers one-hour service ($1,000), two-hour service ($500), same-day service ($100-$200), and next-day service ($50-$100). Even if you just do the regular incorporation, it doesn’t take very long, whereas many other states will take a full 30 days.

Delaware also has a Court of Chancery, which functions as the nation’s — if not the world’s — premier business law court. Law schools in other countries routinely study Delaware Court of Chancery opinions. These judges are some of the most esteemed legal minds in the world, and they do nothing but business law all day every day. Many older lawyers say that early in their career, they would undertake an exhaustive analysis of which jurisdiction was absolutely right for their client, and then after seeing things go wrong on a couple of deals and their clients end up in a state court with a judge who is fresh off hearing a DUI case and doesn’t know nor particularly care what the law says, they now just go with Delaware for everyone.

Should you? Given the above, should you just say “Delaware” and then go back to your fidget spinner?

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If your client is forming a single-member LLC, there is likely no compelling reason to form in Delaware. Yes, Delaware is the leader in the field of corporate law, even for LLCs, and given the body of Chancery Court opinions it’s generally fairly easy to figure out what the law is on a given matter, but what are the odds a single-member LLC is going to end up in a situation in which a deep-dive analysis into cutting-edge legal issues is even necessary? Not great. Most of my single-member LLCs are service providers who just need the liability shield. It’s hard to foresee some sophisticated legal issue arising.

Also, if your client forms in Delaware, then your client likely has to file some sort of “application for authority” or “doing business in” its resident state, and though one more filing doesn’t seem like too much trouble, each required filing increases the risk of a missed filing, which can blow the corporate (or LLC) liability shield. Sure, right now the client is paying attention, but once your client’s business takes off and they’re putting in long hours, can they really be expected to be staying on top of numerous filings? After all, you might not always be around. So, if it’s a simple, straightforward corporation and definitely if it’s a single-member LLC, it’s likely better to stick with the state of residence.

Here are some other questions to ask yourself:

How will the company be funded? Is it going to be applying for grants? Look at any state and local grant programs to which the client is interested in applying. Do they require the company to be domiciled in the state? They might. You better check. There used to also be a popular securities registration exemption that affected the “where to incorporate” test, but due to recent changes in the law, this is no longer the concern it once was.

Can founders be held personally liable for wage-and-hour cases? They can in New York. If your client is a startup that is going to be using investor money to hire a team of engineers, then this is something you should check (though where the company is domiciled may not matter as much as where the employees actually physically work).

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Usually you can change a state of incorporation fairly easily, through a filing with both the new and old state offices (and maybe just the new state’s office). Sometimes you have to form a new entity in the state you want to go to, and then do a merger. Even when the process is simple, it’s generally not a good look if you have to change a client’s state of incorporation for something that you should have reasonably foreseen. (“Hey, lawyer boy, why didn’t you tell me that before?”) So, take a moment to stop and think about the jurisdiction issue. Like with a lot of things, one size does not fit all.


Gary J. Ross is a partner at Ross & Shulga PLLC, which he co-founded in 2017 after running his own firm for four years and after several years in Biglaw and the federal government. Gary handles corporate and securities law matters for venture capital funds, startups, and other large and small businesses, as well as investors in each. You can reach Gary by email at Gary@RSglobal.law.