Where Do Privately Held Corporations Incorporate?

The second foundational legal decision the entrepreneur faces is where to incorporate a corporation or organize a LLC. A corporation or LLC can be formed in any state regardless of where the company is physically located, which many but not all scholars believe gives rise to a jurisdictional competition among the states.

In this post, I compare where corporations are physically located with where they incorporate (i.e., file articles of incorporation). The results are somewhat surprising compared with the most recent work on privately held corporations. In the next several posts, I will explore the reasons for the surprising results from this data and turn to where LLCs are located and organized.

First, where are corporations physically located? As in the last post, I leverage data taken from all Form D filings from mid-2009 to mid-2012. I extracted the state of each corporation’s headquarters from the Form D filings for the 12,079 privately held corporations to compile the following table of the top 25 headquarters states.

Table I. Where Are Corporations’ Headquarters Physically Located?
State of Headquarters	Number of Corporations	Percentage
CALIFORNIA	3460	28.64
NEW YORK	975	8.07
MASSACHUSETTS	874	7.24
TEXAS	720	5.96
WASHINGTON	584	4.83
FLORIDA	473	3.92
COLORADO	438	3.63
PENNSYLVANIA	343	2.84
ILLINOIS	338	2.8
GEORGIA	269	2.23
NORTH CAROLINA	242	2
NEW JERSEY	234	1.94
MARYLAND	232	1.92
MINNESOTA	219	1.81
VIRGINIA	217	1.8
OREGON	193	1.6
CONNECTICUT	182	1.51
ARIZONA	181	1.5
UTAH	158	1.31
OHIO	151	1.25
NEVADA	140	1.16
MICHIGAN	131	1.08
TENNESSEE	128	1.06
MISSOURI	102	0.84
WISCONSIN	102	0.84
OTHERS	993	8.22

Not surprisingly, California dominates the list, with New York and Massachusetts having strong showings. Looking at trends over time (not presented in the data), it appears that California and Massachusetts are slowly losing corporations, while New York and Texas are gaining them. Overall, however, companies are roughly distributed proportionately to population, with a few states like California having a share disproportionate to their populations.

When we turn from physical location to state of incorporation, however, the results are dramatically different. Table II shows the state of incorporation for corporations in the top 25 states.

Table II. Where Are Corporations Incorporated?
State of Incorporation	Number of Corporations	Percentage
DELAWARE	7550	62.51
CALIFORNIA	899	7.44
NEVADA	479	3.97
WASHINGTON	329	2.72
TEXAS	301	2.49
FLORIDA	273	2.26
COLORADO	191	1.58
MARYLAND	177	1.47
OREGON	138	1.14
GEORGIA	134	1.11
MINNESOTA	131	1.08
ILLINOIS	120	0.99
NEW YORK	113	0.94
PENNSYLVANIA	98	0.81
NORTH CAROLINA	89	0.74
WISCONSIN	74	0.61
VIRGINIA	69	0.57
MASSACHUSETTS	56	0.46
MISSOURI	55	0.46
ARIZONA	53	0.44
TENNESSEE	53	0.44
MICHIGAN	52	0.43
OHIO	52	0.43
UTAH	50	0.41
INDIANA	46	0.38
OTHERS	497	4.11

The majority of the privately held corporations in this sample incorporated in Delaware (about 62.5%).  California comes in a distant second with about 7.5%, and Nevada third with about 4%. After that, no other state can claim more than 3% of the total corporations. Even though California, New York, and Massachusetts topped the list of headquarters states, only California could even crack the top 10 of the states of incorporation. Massachusetts, which was third for headquarters states, barely even made the top 25 states for incorporations, narrowly edging out Tennessee.

The results of this analysis are actually quite surprising, given the current state of research on privately held corporations. On one hand, corporate lawyers have known for a long time that the majority of publicly traded companies incorporate in Delaware. On the other hand, until recently there was little evidence of where privately held companies incorporated.  Most scholars have argued that privately held companies were much more likely to organize in their home states than in Delaware. A well-known article by Professors Marcel Kahan and Ehud Kamar, for example, makes that tendency a key piece of their argument about Delaware’s pricing scheme for corporations.

This conventional wisdom about private companies was bolstered by data in a recent paper by Professors Jens Dammann and Matthias Schündeln. Using a new data set, the authors suggested that the vast majority of privately held corporations are incorporated where they are located, not in Delaware. Indeed, corporations were only more likely to incorporate in Delaware than elsewhere when the companies were very large (over 10,000 employees).

The results I obtain from the Form D data, however, tells a very different picture. It shows that privately held companies that file Form D incorporate in Delaware in almost exactly the same proportions as publicly traded companies. The question therefore arises, assuming that both the Form D Data and the Dammann and Schündeln data are accurate, what is it about Form D companies that makes them more like public companies than the existing studies would suggest?

In the next post, I tackle this question by looking at some explanations for why private corporations that file Form Ds tend to be incorporated in Delaware, while studies show most private corporations are incorporated in their headquarters state.