Ever wonder where to form your company? Is one state really “better for business” as some recent politicians have implied? The following information as a brief overview and comparison between three states: Delaware, Florida, and Ohio. This is not meant to replace the need for personally tailored, individual legal advice for your business entity or structure. State formation/registration and the attendant consequences of that formation will vary based on particular client residency, assets, real property, business classification, etc. Where the client may retain flexibility to choose, that client may want to consider the potential consequences between states. Here is a brief glimpse into the differences of the business taxation and legal culture as compared by and between Florida, Delaware, and Ohio.
Court System and Chancery—legal distinctions between states:
Delaware is the leading incorporation state in part because it has a separate Court of Chancery, which handles corporate law cases quickly and with more expertise than the general courts in most states. Delaware retains the ability to efficiently handle business litigation; Delaware has a long history of defined case law and precedent in which Companies rely upon for consistency and reliability for swift legal resolution. DE favors the business itself vs. the minority owner/shareholder (majority may rule).
Ohio—Ohio does not have a separate court of Chancery. Business suits are handled by the Court of Common Pleas. Although DE law is only persuasive, Ohio courts have relied on provisions similar to DE rather than the Model Business Corporation Act, a much more minority friendly code.
Florida– no separate court of Chancery and, in fact, Florida looks to the Model Business Act for its legal authority more so than the Delaware case law provisions [which tend to be more pro-business and de-emphasize duties of care on directors]. DE case law will be the most business friendly; while it can be persuasive, it is not controlling in either FL or Ohio. Florida tracks similarities in DE but more often relies on the MBCA than does Ohio.
Business Income—tax distinction among the states:
Delaware has no sales tax, income tax, or intangible personal property tax.
Ohio—Ohio does have a sales tax for retail businesses; a non-resident income tax [all members of Ohio business entities pay taxes on income attributable to Ohio business income and assets and additionally, any foreign business income derived from Ohio real property See O.R.C. 5747.01]; and a Commercial Activity Tax (“CAT tax”) see below. While Ohio formerly imposed a “dealer of intangibles” tax on business income derived from notes, mortgages, securities, bonds, etc., where that income exceeded 50% of the individual’s gross income for 2 of the past 3 years [O.R.C. 5725.01]; however, this tax no longer applies to business’ income post January 1, 2014. Ohio CAT tax is assessed on businesses that have real property in Ohio over 50k, regardless of where the income goes. This means that even if client incorporates in DE, client will still be subject to this tax in Ohio—inescapable with regard to Ohio real property ownership. CAT tax is flat at gross receipts between 150k-1million=$150. For businesses making more than 1 million in gross receipts, the tax is 0.26 % on amounts over 1 million (i.e. tax @ 2 million in gross receipts would be $150 + $2,600 =$2,750.00)
Florida—Florida does not impose an income tax on individuals. Florida imposes a franchise tax on foreign and domestic corporations (and LLCs taxed as corporations) for the privilege of doing business in Florida. The tax is imposed at the rate of 5.5 % of net Florida income for the year.
The first $25,000 of net Florida income for the year is exempt. Also, client will owe Florida Alternative Minimum Tax if client owed federal alternative minimum tax. If a client operates client business as a partnership, there is no partnership-level tax in Florida (likewise, an LLC taxed as a partnership will have no entity level tax).
Anonymity and Creditor Protection Aspects – single member implications
Delaware—allows the members and managers to remain anonymous, making it easier to shield assets. By naming a local Delaware attorney as the registered agent, client can remove all reference to client and the other investors. IRS is the only actor who has to know about the income and assets of the LLC.
Ohio—Ohio allows single member entity ownership as well as liability protection. O.R.C. 1705.19(C) provides: No creditor of a member of a limited liability company or any member’s assignee shall have any right to obtain possession, or otherwise exercise legal or equitable remedies with respect to, the property of the limited liability company. O.R.C. 1705.19(B) strengthened Ohio’s charging order protection. The new subsection (C) clarifies that a creditor of a member simply cannot exercise legal or equitable remedies against the property of the limited liability company.
Florida—allows single member ownership but see: Florida does not have asset protection available for single member entity; See Olmstead v. FTC, Fla. Sup. Ct. No. SC08-1009 (2010). Charging order is still the exclusive available remedy for multi-member LLCs, etc.
Start Up and Continuing Costs
Delaware—The filings fees with the Secretary of State are roughly $250; plus annual fees are $150 or less per year. Agency fees at roughly $99-250, depending on level of service requested from DE firm.
Ohio—The initial filing fees are $125 but Ohio has no annual filing fees. Additionally, there are no agency fees, as long as either the client is a resident or Attorney is licensed and located in Florida.
Florida—The initial filing fees range from $35-$125; plus annual filing fees as follows: corporations: $150; LLCs: $138.75; LPs: $500; LLPs: $500; Non Profits: $61.25. Additionally there are no agency fees, as long as either the client is a resident or Attorney is licensed and located in Florida
Delaware—no minimum capital requirements
Ohio—Ohio also has no capital requirements
Florida—Florida has no capital requirements
Contract Protections and Minority Rights
Delaware the LLC operating agreement is the contract that governs the company’s operations. The great thing is that the Delaware Limited Liability Company Act governs a Delaware LLC, providing a firm legal foundation. For example, if client LLC operating agreement calls for members to contribute cash or property at certain dates or in the case of certain events, that becomes a legally enforceable requirement. See §18-502,
Ohio—Ohio has similar governing provisions; Ohio law has default rules that operate only in the absence of an operating agreement, whereby client can tailor provisions to client needs. In Re Hydrogen, LLC, United States Bankruptcy Court, S.D. New York, April 2010
Florida— “A person may not commence a proceeding in the right of a domestic or foreign [LLC] unless the person was a member of the [LLC] when the transaction complained of occurred or unless the person became a member through transfer by operation of law from one who was a member at that time.” But consider the potential effect of the decision of the Florida Supreme Court in Olmstead, et al. v. Federal Trade Commission, 44 So. 3rd 76, 2010 WL 2518106 (Florida June 24, 2010). In Olmstead, the creditor was able to attach the single member interest in full and assume the LLC. Even so, Olmstead has no implications for multi-member LLCs formed under Florida law and they retain creditor protection aspects, due to the legislative “patch” to F.S. 608.433 adopted by the Florida Legislature in Spring 2011.
Delaware—Where the client is not a resident, an annual fee of $90 or more may be paid to Agents and Corporations, Inc. (i..e., professional agents available) to serve as the statutory Registered Agent and to receive and forward copies of legal actions filed against the Corporation. Annual meetings may be held at any place and minutes can be signed by consent without a meeting.
Ohio—Where the client is not a resident, Roth & Bacon Attorneys may be agent and no fee would be assessed for those services; owner can serve as own agent and incur no filing fee; also—to look up documents, etc., no continuing access fee whereas Delaware Secretary of State paperwork requires fee for access.
Florida— Where the client is not a resident, Roth & Bacon Attorneys may be agent and no fee would be assessed for those services; owner can serve as own agent. Similar to Ohio, there is no fee incurred for access to online review.
This article was written by Jessica B. Moon, Attorney licensed in Ohio and Florida. David Bacon and Jeffrey Roth, and Jessica Moon are Member Attorneys in Roth & Bacon Attorneys, LLC. Their Offices are located in Upper Sandusky, Marion, and Port Clinton, Ohio, and Fort Myers, Florida. They have focused their practice to provide estate and business planning concepts to their clients. Nothing in this article is intended for, nor should be relied upon as individual legal advice. The purpose of this article is to help educate the public on concepts of law as they pertain to estate and business planning. Copyright @ Jessica B. Moon 2014.