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Choice of State Law in Entity Formation

April 13, 2006

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When choosing a state for your business entity, state fees should not always be the only, or even the main, consideration.

Simply put, the laws in each state are not all the same, and some states offer significantly greater asset protection and other benefits as well. The internal affairs (voting, management, etc.) and the liability of the owners for a limited liability company (LLC) or corporation will be governed by the state where the business is formed, and not the state where it does business.

In particular, some states have a reputation for developing a body of law and a court system favorable to the business owner. Delaware is perhaps the best example of such as state. Nevada also has gained a reputation as a desirable state in which to form a business.

Thus, consideration should be given to forming an entity in one of these states, especially when the business owner's home state is deficient from an asset protection perspective.

Some of the particular advantages available under state law include:

• protection of business assets against personal creditors
• full-shield liability protection
• management flexibility and simplicity
• statutory close corporation option
• asset protection trusts
• tax incentives
• exemption from securities registration

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