Why Form an LLC inDelaware vs. Nevada?
Making a Choice Between Delaware and Nevada
Choosing the right domicile for your corporation or LLC can be a difficult and daunting process if you’re not familiar with the laws and taxes in each state; however, business owners often narrow their choices down to two states: Delaware and Nevada.
Each state has its own advantages, but there is often a clear winner in the Delaware vs. Nevada LLC debate. Below is a breakdown of the pros and cons of forming with each state, so you can make the most informed decision possible when choosing a domicile for your business.
Delaware vs. Nevada LLC Comparison
Our U.S. and foreign customers often ask about comparative costs, benefits, and other comparisons between Nevada and Delaware LLCs when it comes to forming an LLC. Nevada costs more than Delaware. Nevada has a publicly available list of managers, while Delaware does not list managers of Delaware LLCs on public record.
The minimum filing fee is $90 to form a Delaware LLC. In contrast, the minimum filing fee to form a Nevada LLC is $425 (included in this cost are: (1) list of LLC Managing Members/Managers, (2) Nevada business license, and (3) filing fee, as required by Nevada law).
Unlike Nevada, Delaware LLCs do not have to purchase a Delaware business license if they do not do business in Delaware.
- Other Comparisons
- Delaware companies have a better reputation in the business community, as judged by the United States Chamber of Commerce.
- Neither Delaware nor Nevada requires a bank account to be opened or meetings to be held in state. Neither state requires a physical office or mailing address to be maintained, other than a registered agent address. Please note, Delaware bank accounts (opened at a Delaware branch in person or by correspondence, even if the bank is regional or national) are exempt from attachment by creditors (other than tax creditors, spousal and child support creditors, and some other exceptions). This bank account exemption from attachment is provided under Title 10 of the Delaware Code, Chapter 35: Attachments, Section 3502: Corporations subject to attachment and garnishment. You should never make a fraudulent transfer to anyone, including a bank account, because a fraudulent transfer can be undone and result in penalties.
- Member and Manager Disclosure: Delaware
Although Delaware does not require the listing of Managers and members in the initial Certificate of Formation for an LLC or any other subsequent filings, and because Annual Reports are not required, it is also true that:
- All filings with the Delaware Division of Corporations are public record;
- Delaware legal entities are prohibited from the sale or transfer of shares or ownership interests in bearer form;
- Every Delaware legal entity is required to provide its commercial registered agent with the name of a natural person who acts as the communications contact for the entity;
- Delaware registered agents are required to retain the above-mentioned communications contact information;
- Federal and state laws provide legal mechanisms, recourse and due process that enables officers, directors, shareholders, and law enforcement to inspect the books and records of an entity.
- Member and Manager Disclosure: Nevada
- Nevada, like Delaware and most states, requires no member or beneficial owner disclosure;
- Nevada requires an initial list and annual list of managers or managing members of an LLC.
Therefore, the Delaware LLC is superior to the Nevada LLC. What about corporations?
Delaware vs. Nevada Corporation
Reasons that Nevada is better than Delaware are not well founded, except in the context of small business corporations and corporations that want to limit stockholder rights, and therefore, threats of stockholder lawsuits.
In spite of their best efforts to create an environment more conducive to business incorporating, Nevada has largely failed to attract out-of-state and international incorporation business at levels greater than Delaware.
- Nevada Corporation: More Protection for Directors, Less Protection for Owners
There are many differences between Delaware and Nevada corporation liability law, which are all tailored to make directors and officers less liable in Nevada (this does not apply to LLCs). First, the corporation law in Nevada extends liability protection for breaches of the duty of care to officers, whereas Delaware corporation law only removes liability for these breaches from directors if a firm opts to remove such liability in its Certificate of Incorporation. In Delaware, directors and officers are liable for breaches of the duty of care (unless the firm opts-out); breaches of the duty of loyalty; actions done in bad faith; improper personal benefit; and intentional fraud, misconduct, or knowing violation of the law. However, Nevada corporations must only make directors and officers liable for behavior that is both a breach of the duty of loyalty and intentional fraud, misconduct, or knowing violation of the law. These firms can opt-in to make officers and directors liable for other violations, such as breaching a duty of loyalty or improper personal benefit, but the current Nevada corporation law does not mandate liability for things such as self-dealing with the company or conflicts of interest. Additionally, corporations organized in Nevada can choose to indemnify officers and directors from all actions, as well as choose to indemnify their legal expenses, which is more limited in Delaware. It is also impossible to indemnify acts of bad faith for Delaware corporations. This decreased Nevada liability is seen as the main benefit of incorporating in Nevada, rather than Delaware. This additional protection for management from shareholder lawsuits has not attracted much corporate business to Nevada.
In theory, the main benefit to incorporating a corporation in Nevada is lower cost of litigation. Nevada’s law is fairly clear on the limits of liability for corporate officers and directors, meaning that less litigation should be required. This will benefit corporations that either would not want to go through this extensive litigation or firms which already have strong internal controls in place to combat breaches that would lead to litigation. However, in the case of litigation, Delaware has a judiciary that is more skilled at adjudicating business disputes than that of Nevada, due to Delaware’s history as the chief state of incorporations. Delaware also has a much more extensive history of case law than Nevada.
- Delaware Corporations Offer Value to Stockholders, Making Corporations Worth More
Statistical studies have shown that incorporating in Delaware tends to provide a premium to the market value of a corporation in relation to its assets, whereas Nevada does not provide that same premium to corporation value. This is due to both the brand of Delaware as a state for incorporation and the difference in which group is favored by the laws of the states: Delaware law is pro-stockholder, while Nevada’s law is more tailored to suit the wants and needs of directors and officers. As a result, institutional ownership of corporations tends to be higher in Delaware than in Nevada.
This preference for wants and needs of directors in Nevada also makes the composition of the board of directors for Nevada firms different than those in Delaware. Boards of directors in Nevada tend to include many more insiders than their counterparts in Delaware, which could either be for private benefit through self-dealing with the Corporation or to maintain more control over the operation of the firm, depending on the motivations of the board of directors.
The Nevada board of directors structure would lend itself much more to a smaller, family corporation, which appears to be one of the types of firms that incorporate in Nevada. Family firms would also benefit from a lower cost in Nevada because they are not required to have independent directors, which are stressed in Delaware.
Therefore, most businesses should prefer the Delaware LLC over the Nevada LLC. For Corporations, the outside investors prefer Delaware, whereas management may prefer Nevada. In sum, both Delaware and Nevada offer more protection and predictability than your home state. Delaware tends to be preferred for corporations and LLCs.