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The Incorporation Dilemma: New York v. Delaware LLC


When conducting business in New York, operating under the umbrella of a Limited Liability Company (“L.L.C.”) can be a useful tool to limit personal liability. The two most often used states of incorporation are New York and Delaware. While Delaware is generally preferred, below are a list of factors to consider when trying to decide which option is best.

Filing Fees

The fee for filing the articles of organization for a New York L.L.C. is $200, while the fee for filing a certificate of formation in Delaware is only $90.00. However, if the Delaware L.L.C. intends to conduct business in New York, it must file an application of authority for a foreign limited liability company, accompanied with a certificate of good standing from Delaware. The determination of whether the Delaware L.L.C. is conducting business in New York is largely fact specific. The filing fee for the application for authority is $250, and the Delaware fee for a certificate of good standing can range from $50 (for a short form certificate) to $175 (for a long form certificate).

New York Publication Requirements

Within 120 days after its articles of organization become effective (in the case of a New York L.L.C.) or filing as a foreign entity (in the case of a Delaware L.L.C.), the L.L.C. must publish a copy of the articles of organization (or a notice related to the formation of the L.L.C.) or application for authority (or a notice related to the qualification of the L.L.C.) for eight weeks in two separate newspapers located within the county in which the L.L.C. is located. The affidavits of publication, certificate of publication form, and filing fee must be filed with the New York Department of State.

Accounting Fees/Tax Filings

A Delaware L.L.C. is not required to file an annual report but is required to pay an annual franchise tax. Taxes are to be received no later than June 1 of each year. The franchise tax is a flat rate of $300.00. A Delaware L.L.C. conducting business in New York (or a New York L.L.C.) must also pay an annual filing fee to New York State using Form IT-204-LL.

Statutory Representation/Registered Agent in Delaware

Delaware law requires that an L.L.C. have and maintain a registered agent in Delaware who may be either an individual resident or a business entity that is authorized to conduct business in Delaware. The registered agent must have a physical street address in Delaware. Consequently, the fee for a registered agent in Delaware will represent an additional annual cost. New York does not require a third-party registered agent.

Fiduciary Duty

Delaware expressly permits the restriction or elimination of fiduciary duties with the exception of the duty of good faith and the duty of fair dealing. Likewise, in New York, an operating agreement may limit or even eliminate the personal liability of managers or members. However, the New York operating agreement cannot limit or eliminate the liability of a manager who acts in bad faith, is involved in intentional misconduct, has knowledge of a violation of the law or has gained a financial profit to which he or she was not legally entitled. On the other hand, Delaware specifically provides that an L.L.C. is bound by its limited liability company agreement whether or not the L.L.C. executes the agreement. While Delaware does not require one, we nevertheless generally recommend a written operating agreement (limited liability company agreement) for Delaware L.L.C.’s.

Removal of Managers

In Delaware, a manager is typically removed pursuant to the terms of the limited liability company agreement. An L.L.C. may recover damages if the resignation contravenes the L.L.C. agreement. In New York, managers can be removed with or without cause by a vote of a majority of the members entitled to vote. However, this rule may be changed by a provision in the operating agreement. As in the case of a Delaware L.L.C., a manager may resign, although the L.L.C. may recover damages.

Merger

Delaware permits a merger of an L.L.C. without a vote of members if expressly provided in the L.L.C. Agreement. If not stipulated in the agreement, then a merger is permitted if approved by members owning more than 50% of the ownership percentage (or other ownership interest) of the L.L.C. In New York, an operating agreement may change the percentage required for a merger approval, but this percentage cannot be less than a majority in interest who are entitled to vote.

Indemnification

Both New York and Delaware allow indemnification of any member or manager or other person

This publication is issued by Simon Meyrowitz & Meyrowitz, P.C. for informational purposes only and does not constitute legal advice or establish an attorney-client relationship. To ensure compliance with requirements imposed by the IRS, we inform you that unless specifically indicated otherwise, any tax advice contained in this publication was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any tax-related matter addressed herein. In some jurisdictions, this publication may be considered attorney advertising.

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