Still Choosing Delaware? Ohio Could Be the Smarter Choice for Business Formation – KJK

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.

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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 comparative chart below 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:

	Ohio	Delaware
Filing Fees (Formation)	Predictable, filing fees for any entity form that are generally reasonable	Filing fees may be significantly high for corporations if the company plans to authorize a large number of shares
Processing Times	The Ohio Secretary of State’s office maintains consistent, routine processing times for corporate filings, which includes reasonable expedited filing fees	Turnaround times for corporate filings vary, with very extended response times a frequent occurrence, and expedited filing fees, if offered, are significantly high
Registered Agent Requirement	No need to appoint a registered agent if the company has a physical presence in Ohio (i.e., Ohio is its home state)	Must hire a registered agent with a presence in Delaware who will bill the company to file its formation documents and all filings, and who will assess annual representation fees
Annual Reports/ Franchise Taxes	No annual reports (or fees) or franchise taxes for any entity form	Filing of an annual report (and associated fees) and payment of franchises taxes required regardless of entity form, and franchise taxes can be significant for corporations depending on share structure
Foreign Registration	No need to file foreign registration for home-state entities	Must register as a foreign entity if company transacts business in Ohio (leading to more fees)

Next Steps

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.

Contact

For assistance related to business formation, contact KJK Corporate & Securities attorneys Jessica Wiedemann (JLW@kjk.com) or Samantha Cira (SMC@kjk.com).