• Technology
  • CFO.com | US

Vermont Wants to Be the “Delaware of the Net”

Under new law, virtual firms — without headquarters, paperwork and face-to-face director meetings — are welcomed there.

Known for its Green Mountains, maple syrup, and, of course, moonlight, Vermont might not seem the most likely state to welcome companies with edgy technology. And yet it is virtually in the lead.

A bill signed into law earlier this month positions it as a leader in incorporating so-called virtual firms — those without a physical headquarters, actual paper filings, and directors’ meetings (they’re all online.) If it succeeds, it could emerge with the nation’s first virtual tech corridor.

The bid to attract companies with infrastructures as diaphanous as Vermont’s moonlight has special appeal. It aims to offer far-flung groups, working on collaborative projects, the benefits of a corporation connection — without the costs that come with commuting and using centralized office space. Officials hope the law will replicate the success that Vermont has had as an “offshore” haven for captive insurance arrangements. That effort has drawn more than 500 companies to set up entities in the state.

“Like with captive insurance, we’re changing with the times,” Mike Quinn, commissioner of Vermont’s Department of Economic Development, tells CFO.com. “We expect to see some activity from this.”

One company that could be attracted to Vermont’s new model is Metanomics , an online forum of weblogs, chat sessions, and video interviews run by Robert Bloomfield, an accounting professor at Cornell University’s Johnson School of Management. With a dozen people working and contributing from sites in Belgium, Australia, California, as well as New York state, this virtual nonprofit organization certainly has the potential to bring in real money.

“It would be nice to be a corporation and enjoy all of the benefits, without having to ever be in the same place at the same time,” says Bloomfield.

The provision is likely to benefit group efforts in cases where distance does not matter. Open source approaches, wikis, software developers, and publications would be ideal for Vermont, which hopes to be the “Delaware of the Net.” Delaware, of course, has created a haven for business incorporations by offering low taxes and favorable regulation for companies.

What Quinn describes as an esoteric element to a tax amendment was actually an academic brainchild. David Johnson, a professor at New York Law School and head of the Virtual Company Project has lobbied for Vermont to change its rules for Limited Liability Companies (LLC) as a way of adapting corporate structure to the Internet age.

“People are coming together online to create valuable things,” says Johnson. “They do that for social reasons or reputational reasons, but they find it difficult partly because of traditional barriers in corporate law.”

The organic nature of online companies tends to clash with the more rigid traditional corporate culture that requires a charter, a hierarchy of managers, and investors for raising capital. To produce work online, people merely need a computer linked to the Web and their “intellectual capital.” Until now, much of this type of work, exemplified by the comprehensive Wikipedia encyclopedia, has been done for love rather than money.

“The idea is to develop an enterprise that allows people to collaborate over the Web and eventually start distributing it and making money,” says Peter Erly, a lawyer with the Vermont-based firm of Gravel and Shea. “At least before a corporate structure like this was out there, it was difficult for these people to get a bank account and organize themselves in any meaningful way.”

Johnson argues that people will now have more incentive to create in a collaborative way if it is easier for them to profit from their work with limited liability — without being classified as partnerships — thus being able to open accounts, distribute proceeds and enter into contracts with others.

Although Vermont’s virtual-company law has generated interest and chatter on the Web, even Bloomfield acknowledges that Vermont might not be his first choice for incorporating Metanomics, which focuses its discussions on the economics and policy surrounding virtual worlds. He will first check with a lawyer to see if there are any important benefits to being incorporated in Delaware or New York. However, given the nature of his venture, he admits that a paperless company without physical contact might be too symbolic to resist.

For its part, Vermont hopes to burnish its reputation as a pioneer in corporate governance, and to attract new companies from around the country— along with fees. The state will charge virtual companies the same amount — about $235 per year — that standard corporations pay when filing.

“We’ve been trying to make Vermont on the leading edge for newer tech companies for some time,” says Quinn. “This fits into that philosophy.”

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