Delaware has long been considered the jurisdiction of choice for startups pondering incorporation. Reasons frequently given for this include a well developed body of corporate law and experienced court of chancery to hear business cases, efficient procedures for filing and reporting and, importantly, institutional investor familiarity with Delaware law. But should these factors necessarily preclude an early stage company from organizing as a corporation in their home state? In this post, I provide a basic outline of key distinctions between Delaware and Washington startup incorporation, allowing the reader to evaluate where they align and diverge and educate themselves as to which might provide the best fit for their new company. As always, it is advised that you consult with legal counsel when forming a company to provide advice relevant to your specific needs.
- Investors may demand it. Because most funders are simply more familiar with Delaware companies and the Delaware General Corporation Law (DGCL), they may insist that your company reincorporate before they consider an investment, though this may not be as common with Washington companies as it is with companies domiciled in states such as California.
- Developed and predictable case law. The Delaware Court of Chancery, a trial-level state court from which appeals are sent directly to the Delaware Supreme Court, has jurisdiction over corporate law matters concerning Delaware companies. Because of the high degree of specialization in this court, there is a much more developed body of case law for attorneys to consult for guidance in the event of a conflict. The Court of Chancery also makes a point of timely and efficient resolution of matters.
- Good protection for directors. In general, Delaware courts will defer to the business judgment of directors, absent any breach of their fiduciary duties loyalty or good faith and fair dealing. In addition, Delaware law provides strong indemnification of directors, strengthened further in 2009 to eliminate the possibility of retroactive amendment of bylaws to limit indemnity.
- Easy compliance with procedural formalities. The DGCL allows for stockholder meetings to be conducted remotely via the Internet or other electronic means, and voting via electronic proxy—two major efficiencies that illustrate how the DGCL manages to keep in step with changing times.
- Less expensive at the outset. The filing fee for a Washington for profit corporation is $200 if filed online (2-3 day processing), or $180 if on paper (processed in order received).
- No franchise tax. Washington corporations only pay a $69 annual license renewal fee. See the section on DE Disadvantages for more on the franchise tax.
- Many large companies are WA corporations. Including Microsoft, Starbucks, Costco, and many others (but not Amazon.com).
- Better protection for directors. Personal liability of directors in Washington is more narrowly defined than in Delaware, and uses well-defined terms limiting scope to “intentional” conduct or “knowing” violations. By contrast, §102 of the DGCL requires that directors be liable for breaches of the duty of loyalty and for acts or omissions not in good faith, concepts that are not defined by statute, and are not fully addressed in case law (the latter described in In Re Walt Disney as “[s]hrouded in the fog of . . . hazy jurisprudence”).
- Washington also has a well developed corporate law. The Washington Business Corporation Act (WBCA) is robust. The WBCA was enacted in 1989, and is based on the 1984 ABA Model Business Corporation Act (MBCA). Most states have enacted a version of the MBCA, and, according to the legislative notes, Washington’s own WBCA looks to those other states for guidance on points of law that have not been addressed in Washington courts.
- Foreign Corporation requirements. A Washington-based company forming in Delaware is not only responsible for Delaware registration fees, but also for Washington foreign corporation registration fees (currently $180 for paper filing, $200 for electronic).
- Certificate of Good Standing. You must also obtain a certificate of good standing from the state of Delaware ($50-$125)
- Annual franchise tax. All Delaware companies are subject to an annual state franchise tax. If your company uses the “shares authorized” method for calculating the tax, your bill could be extremely high (though the minimum is $75). If you use the assumed par value method (as is the case with most startups), your minimum bill will be $350. The state of Delaware maintains a handy excel spreadsheet that you can use to determine how much you may owe.
- Registered agent. You will need to pay a registered agent in Delaware to receive service of process on the corporation.
- Potential legal issues later on may require Delaware counsel. If you get sued in a Delaware court, or have an issue in your incorporation documents that touches on an unresolved point of Delaware law, it could be costly to hire local counsel and get it resolved in Delaware.
- Body of law. Contrary to popular belief, Washington courts cannot be counted on to defer to Delaware law. Therefore, the outcome of any business law case will not necessarily follow the well-developed precedent set by the Delaware Court of Chancery.
- Meeting attendance. Washington corporation shareholders may participate in a shareholder meeting electronically (e.g., over the phone or Internet), but meetings may not be entirely virtual. (See this law review article for information on electronic meetings in other states).
- Shareholder notice. Washington requires two notices to shareholders of actions taken by less than unanimous written consent: one seeking shareholder approval, and the other after sufficient approval for an action has been obtained. Delaware only requires the latter notice.
Other factors to think of when deciding on a state of incorporation include whether or not your company will have immediate financing needs. If your Company intends to seek venture funding soon after formation, an incorporation in Delaware may be your best option since it is familiar to investors, and would not require a reincoporation. If you intend to self-fund initially for a period of time, then it may be more attractive to form as a Washington corporation due to the lower cost and lower administrative burden. Likewise, if your startup is cash strapped, and just looking to create the corporate entity to get things going, Washington will prove a less expensive option at the outset and there is nothing about formation in Washington that will necessarily stand in the way of progress down the road, though it will be a topic of conversation with potential funders.