The business community widely considers Delaware to be the favored state for forming a company. Many companies seeking to expand beyond single-state operations choose to form Delaware companies because Delaware has some of the most stable and friendly business laws in the United States and is the preferred state of incorporation for traditional investors.
Delaware company law operates from a basis that people who enter into business deals are sophisticated and takes a contractual approach when it comes to the affairs of a company, its owners and its management. What this means is that the relationships between the company, its owners and its management are very customizeable, and what the different parties have agreed to will usually be upheld absent manifest unfairness or impropriety.
New York, on the other hand, recognizes that some people might be less sophisticated, or that even sophisticated people may be at a disadvantage to significantly protect their own interests in the face of overwhelming leverage. Therefore, New York law has certain built in controls that, while protective of minority shareholders, impede the efficiency, and sometimes the value, of some business transactions. Perhaps due to New York’s political climate, New York law makers have built into New York’s company laws certain provisions that could be characterized as protecting the public from “evil” companies.
A company that is usually held to the company laws of its state of formation. Thus, a Delaware corporation operating in New York will mostly be subject to the Delaware General Corporation Law rather than the New York Business Corporation Law. However, in order for a Delaware company to do business in New York, it must also apply to New York’s Department of State for authority to do so. This means that upkeep of a Delaware company in New York will be subject to the financial and temporal costs of maintaining the company registration in Delaware and the company’s authority to operate in New York.
For a small business that plans to operate in only in New York, the benefits that a Delaware company offers are usually too small to merit the additional cost and effort necessary to maintain the Delaware company. Of course, every business situation is unique.
If you are thinking about forming a Delaware company, James Hsui, PLLC can help you do so. We can also advise you as to the pros and cons of forming a Delaware company so you can make an informed decision as to the specific needs of your business. Set up an appointment with us for a free consultation.