Forming a new business requires addressing a number of principal issues and logistics, many of which draw on structure, liability, policy, tax, and related considerations. After picking the best entity form, the first threshold matter to address is determining the company’s preferred state of formation, and it may not be as simple of a decision as a new business owner may think.
Businesses Historically Favor Delaware
Whether a business looks to grow slowly to a small or mid-sized operation or the owners seek to raise significant investor capital, it would ordinarily be fair to predict the business would default to Delaware as its choice state for formation, oftentimes regardless of its location or where it will primarily transact business. After all, Delaware has customarily been the most common jurisdiction for formation given its well-developed, business-friendly corporate laws and judicial decisions. This Delaware preference has, not surprisingly, been a trend for companies with ties to Ohio, having traditionally chosen Delaware as their state of formation over Ohio.
Confidence in Delaware Dips
Delaware’s status as the leading state choice for corporate formation has, however, begun to waver. Specific evidence centers on grievances related to personal liability standards and constraints on board actions imposed by Delaware’s Court of Chancery.
These complaints about Delaware reached a critical point within the last couple of years. Specifically, several prominent corporations made national headlines as their boards considered (and, in some instances, moved forward with) corporate relocations away from Delaware, due in part to a Delaware Supreme Court decision that made such actions possible, which held that directors generally do not subject themselves to personal liability for approving a company’s move. Among others, Tesla, Dropbox, Meta, Roblox, and Walmart are already relocating outside of Delaware, with more planning to follow suit.
Ohio v. Delaware: Benefits to the Buckeye State
With the spotlight on Delaware looking dimmer, businesses should take the opportunity to reevaluate the traditional “default to Delaware” mindset. Choosing a state of formation is not a one-size-fits-all automated choice. Rather, it is a decision worth more thought.
While newly-formed companies may see Nevada and Texas circulating the media as popular choices, there are a number of reasons why choosing Ohio is an attractive option over Delaware, particularly for businesses where Ohio is their home state (i.e., form Ohio LLCs, corporations, or partnerships for businesses operating in Ohio).
The below comparative chart highlights at a high level several reasons why Ohio may be a better state than Delaware for business formation, with particular emphasis on the benefits of minimizing costs and legal complexity:
As the corporate landscape continues to evolve, and other states potentially race to pass Delaware in attracting formations, it is crucial for new businesses to adequately consider their state of formation. Delaware may still be the proper choice if, for example, an owner is leading a venture capital-funded startup. Yet, recent changes in the corporate space have made it clear that Delaware’s dominant status may be weakening, so simply choosing Delaware reflexively could have some unwanted consequences. Businesses need to consider their short and long-term objectives and goals, and for those that have owners, managers, properties, or significant activities located in Ohio, or are otherwise operationally tied to Ohio, they may very well find that Ohio is a better choice state for formation.
