The choice in establishing a limited liability company (an “LLC”) for a company headquartered or doing business in New York is often between a Delaware LLC and a New York LLC. There was a time when the flexibility of the rules and the competence of Delaware courts in corporate matters often made Delaware a logical choice, but New York can be a good place to set up an LLC. The choice is not entirely one of flexibility or cost, but also what is anticipated in the future and other considerations.
– New York may turn out to be as flexible as Delaware, especially if the operating agreement is well drafted.
– New York may prove cheaper to set up and maintain an LLC than Delaware, especially for smaller entities and those headquartered or doing business in New York.
– New York does not allow direct conversion to a Delaware entity, however, and if, for example, the company anticipates raising money, many early stage and later investors expect to see a Delaware corporation. Conversion from a Delaware LLC to a corporation can be relatively easy.
– Also, New York and Delaware allow a registered agent to form an LLC, and do not require members or officers to be identified or the operating agreement to be filed. The U.S. Treasury Department has begun, however, to require that title insurance companies identify LLC members where the LLC purchases for cash real estate in New York City for more than $3 million.
– There may be other considerations as well, including tax considerations.
Below is a short table comparing New York LLC rules to those in Delaware. This note is not legal advice, is not meant to be definitive and you should consult a lawyer before making this decision.
Certain Comparisons of New York and Delaware Rules Regarding Limited Liability Companies
|Filing Fee||$200||$90. The NY fee, however, is $250 for authorization to conduct business in New York and it costs $50-175 for Delaware certificate of good standing (which must accompany it).|
|Publication||About $1400 in New York County and $250 in Albany County.||No||In New York, the law requires an LLC to publish within 120 days of effective date of articles of incorporation.|
|Filing||Biannual; $9 fee.||No|
|Franchise Fee||Based on NY-source gross income: from $25 if no income to $4,500 for over $25 million. E.g., $175 for over $250,000 through $500,000; $500 for over $500,000 up to $1 million. Form must be filed. A Delaware LLC doing business in New York must pay this fee.||$300 by June 1 each year; but Delaware LLC doing business in New York must pay franchise fee as described at left.|
|Registered Agent||Not required, but the LLC must name the Secretary of State as its agent for service of process.||Required if not physically located in Delaware; the cost varies but it is generally on the order of $100 per year.|
|Operating Agreement||Required within 90 days of entity formation.||Not required; but a Delaware LLC is bound by the operating agreement whether or not the LLC executes it.||Although Delaware does not require an operating agreement, it is strongly recommended.|
|Management||Unless managers are specified, members act as managers. The majority of members can remove a manager unless the operating agreement provides otherwise.||Unless managers are specified, members act as managers. A manager may be removed as provided in the operating agreement or by the Delaware Court of Chancery.|
|Indemnification of members, managers and other employees||Allowed.||Allowed.|
|Merger||Yes, if approved by over 50% of members entitled to vote, or more as specified in the operating agreement.||Yes, even without a vote of the members, as specified in the operating agreement, or if not then approved by over 50% of the ownership by members.|
|Fiduciary Duty||Can be limited in operating agreement, except that there can be no limitation on bad faith, intentional misconduct, known violation of law and legally un-entitled profit.||Can be limited in operating agreement, except the duties of good faith and fair dealing.|