By Eric Franklin
For most new businesses, Delaware is the default state of
incorporation. Many states have tried to unseat Delaware as the preferred
destination for business formation, offering low (or no) corporate taxes,
administrative ease in fulfilling corporate formalities, or favorable business
laws. Nevada is one of these states, openly marketing itself as the Delaware of the West.
However, despite its best efforts, Nevada still lags behind Delaware on
business formations. In 2014, for example, Nevada had 57,644 new entity filings,
which is just slightly more than one quarter of Delaware’s 168,966 new entity
filings for the same period.
Given these data, it appears that Nevada’s bid to become
the leader in business formations has failed. However, there is one area where
Nevada has bested Delaware: formation of benefit corporations.
In 2014, there were 158 benefit corporations formed in Delaware,
while Nevada had 697 benefit corporations formed in the same period.
Thus, despite the fact that there were about three times
as many businesses formed in Delaware than in Nevada in 2014, Nevada had more
than four times the number of benefit corporation formations. What accounts for
this discrepancy? Are Nevada entrepreneurs particularly socially conscious?
Does Nevada law provide more protection for businesses that look beyond the
bottom line? Has the Delaware of the West
moniker begun to take hold among the entrepreneurs interested in corporate
social responsibility?
It turns out that the answer is much more mundane. The
startling number of benefit corporations formed in Nevada is due to the Nevada
Secretary of State’s website design.
As this blog post will show, the architecture of the website inadvertently
encourages the formation of benefit corporations.
To form a corporation in Nevada, an entrepreneur uses
SilverFlume,
a user-friendly Secretary of State website that walks the entrepreneur through an
online formation process in a matter of minutes. After logging in and choosing
“Form a corporation,” an entrepreneur is faced with the following webpage:
Note that on the very first page, the website asks if the
entity is a “Benefit Corporation.” This is the first required question after
the corporation’s name and suffix. If the entrepreneur clicks on the question
mark beside the prompt, a pop-up window provides the following information:
If the entrepreneur selects “Yes,” he or she is asked to
“Explain the purpose of the corporation.” An entrepreneur might put anything in
this section, and there is no mechanism to ensure that the purpose is socially
beneficial. An entrepreneur might simply enter “run a mechanic shop” or “sell
coffee.” The website makes no distinction between a socially beneficial purpose
and a traditional for-profit purpose, and there is therefore no notice to the
entrepreneur that a benefit corporation is supposed to create “a material
positive impact on society and the environment.”
After this page, the website ushers the entrepreneur through the balance of the
formation process, and the benefit corporation question is never again
broached.
By presenting the choice in this manner, the Nevada
Secretary of State has inadvertently encouraged the formation of benefit
corporations. Neither the prompt nor the pop-up window adequately inform the
entrepreneur of what, precisely, a benefit corporation is. All the entrepreneur
sees is the following question: “Is this entity a ‘Benefit Corporation'?”
Without adequate legal counsel, there is no reason for an entrepreneur to
recognize the consequences of this decision.
It is therefore not surprising that Nevada can boast the
formation of so many benefit corporations. It is likely that the entrepreneurs
have no idea what they are choosing. They are presented with the option of
either being or not being a “benefit” corporation. Is it any wonder that many
entrepreneurs have unwittingly chosen yes? Who wouldn’t want to be a benefit
corporation, even if they don’t know what it means?
One might reasonably ask how we can be sure these decisions
were mistakes. Although it is unlikely, certainly there is some chance that
Nevada has a peculiarly socially conscious entrepreneurial community. However,
preliminary research reveals that the vast majority of benefit corporations were
probably formed unintentionally. For example, of the 697 benefit corporations
formed in Nevada in 2014, only one entity has posted the required annual
benefit report on its website.
Delaware takes a very different approach. Benefit
corporations are presented as an entity option in the same list as traditional
corporations, nonprofit corporations, LLCs, and partnerships. Each entity
requires a completely separate set of forms. Thus, an entrepreneur forming an
entity in Delaware must make a separate decision to form a benefit corporation.
The entrepreneur is not, as in Nevada, asked in an offhand manner if the
corporation being formed is a benefit corporation. In Delaware, an entrepreneur
is apprised of the fact that the benefit corporation is a separate entity, with
consequences and responsibilities that may be different from traditional
corporations.
The Nevada Secretary of State website is performing a
disservice to entrepreneurs. By inadvertently persuading entrepreneurs to form
benefit corporations, the Secretary of State is setting the entities up for failure.
Without proper notice of the expectations attendant to being a benefit
corporation, such entrepreneurs will undoubtedly fail to fulfill their
statutory responsibilities.
