Elon Musk Recommends Incorporating in Nevada & Forming LLCs

TESLA CEO Elon Musk has always been one of the most influential figures when it comes to the ever-changing landscape of the corporate world.

Musk recently made headlines after he made a statement recommending businesses to incorporate in Nevada and Texas. Although it seemed like Musk was only sharing his thoughts on incorporation, the move was a jab at Delaware’s ruling regarding his pay package worth more than $55 billion. 

If you want to learn how the class action changed Musk’s view of the First State, you’re in the right place. 

In this blog, we’ll discuss the details of the shareholder lawsuit that caused Musk to incorporate some of his ventures in Nevada. We’ll also explore the benefits of incorporating in the Silver State.

Read on to uncover the intricate relationships between corporate giants and the states they call home. 

The Shareholder Lawsuit

In 2018, Tesla shareholder Richard J. Tornetta sued Musk and the company’s senior executives following the approval of Musk’s $55 billion compensation package. The package will give Musk a large payout and allow him to stock options in the company if it hits specific performance targets.

The lawsuit argued that the process for approving the package was unfair, alleging that Tesla’s senior executives acted with Musk’s interests in mind. It also claimed that the compensation plan was excessive. 

Records have shown that the package was the largest pay package in the history of public markets.

Much to Musk’s dismay, Delaware’s Chancery Court ruled against him. Chancery Court judge Kathaleen McCormick said that the process leading to the approval of the package was flawed. 

She explained that compliant board members allowed the chief executive to oversee his own compensation plan, which goes against their fiduciary duty. 

McCormick said that the package was the product of false negotiations and was only approved by shareholders because they received misleading disclosures. 

Ultimately, the court ordered that the pay package must be voided and that Musk return all the benefits he received from it. 

Musk Responds

In response to the ruling, Musk went on X, the social media platform formerly known as Twitter, to tell his followers to “Never incorporate your company in the state of Delaware.”

Musk also added that he “recommends incorporating in Texas and Nevada if you prefer shareholders to decide on matters.” 

To express his disappointment further, the TESLA CEO created a poll asking his followers if Tesla should change its state of incorporation to Texas. 

Since the release of the judgment, Musk has recharted the social media platform from Delaware to Nevada. He also incorporated his new AI company, X.AI Corporation, and his brain implant company, Neuralink, in the same state. 

A Corporate Haven

Delaware has cultivated a reputation as a corporate haven. More than 60% of the country’s Fortune 500 companies call Delaware their legal home.

One of the primary reasons why Delaware has become so popular among business owners is its unique court system. The state’s Court of Chancery specializes in business disputes, offering expedited proceedings for entrepreneurs like Musk. 

However, Delaware’s laws are becoming more rigid regarding transactions between public companies and the shareholders who control them. The state’s changing legal standards have caused major businesses to rethink their locations. 

One example is Tripadvisor’s media executive Greg Maffei, who received a lawsuit from the company’s minority shareholders after he expressed interest in transferring their charter to Nevada. 

This growing trend of companies leaving Delaware searching for a more favorable environment has motivated other states to improve their business laws and legal frameworks. One state that stands as a strong contender is Nevada.

The Nevada Edge

There’s a reason why Musk and other entrepreneurs of his level are choosing Nevada as their new legal home. 

Unlike Delaware, the Silver State has a higher bar for liability. Directors and executives like Musk will only be held liable for intentional misconduct, fraud, or a willful violation of law. 

Moreover, the state has made “no liability” the default rule for exculpation clauses. This means that a valid exculpatory clause in a contract can protect parties from negligence liability. 

It’s also worth noting that Nevada doesn’t impose a Franchise Tax on corporations and LLCs. This tax break allows growing ventures to allocate more resources towards growth and innovation. 

The state’s business courts have also significantly improved over the last few years. They now provide early comprehensive case management so businesses can continue operations without interruptions. 

With all these benefits in mind, it’s no surprise that major companies like Tesla are packing their bags and moving to Nevada. The Silver State has fostered a strong, business-friendly environment to take on the First State’s established legal infrastructure. 

Staying Ahead of The Competition

While it’s true that Delaware remains the go-to choice for entrepreneurs, Elon Musk’s decision to move his ventures to Nevada highlights the changing dynamics in the corporate landscape.

This shift in needs and preferences challenges Delaware’s long-standing reputation as a corporate haven. More and more companies are scrutinizing its legal framework, causing them to look for other alternatives like Nevada. 

Is Nevada going to unseat Delaware anytime soon? It seems unlikely. Most lawyers still prefer states like Delaware with decades of corporate development. However, this doesn’t mean it’s not possible. 

If the first state wants to maintain its position as the country’s Corporate Capital, it needs to adapt its laws to the changing needs of modern businesses. 

Find The Perfect Home For Your Business 

Want to learn which state is better for your growing business? NCH is here to help. 

NCH is a business formation service provider in Nevada. Our team of business specialists has helped thousands of entrepreneurs find the perfect legal home for their businesses.  

We will help you analyze the needs of your business and assist you in finding the right state for incorporation. We will also guide you through the incorporation process so that you can file your formation documents properly. 

To learn more about our services, visit our website here or call us at 1-800-508-1729 to schedule a consultation.

Disclaimer: The above material has been prepared for informational purposes only, containing opinions of the provider, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.