Where To Incorporate

Where to incorporate

Washington vs. Delaware

For Washington-headquartered companies, incorporate in either Delaware or Washington. Either is fine.

The Punchline

  • If you are cost conscious and don’t mind having to possibly explain why you chose Washington, incorporate in Washington.
  • If you don’t mind spending extra money and incurring a little more administrative hassle, and you never want to have to answer the question–”Why didn’t you incorporate in Delaware?”–incorporate in Delaware.

Washington law is fine and good

  • Washington has a well developed and well maintained corporate law.
  • Although Washington State doesn’t have Chancery Courts (special courts dedicated to handling just corporate disputes), and Washington doesn’t have as long a line of judicial precedent as Delaware, for a startup this isn’t a big deal. Washington courts regularly look to Delaware precedent for persuasive opinion when appropriate. There are nuanced differences between the two state’s laws, but they are substantially similar.
  • Some of the world’s most valuable companies are incorporated in Washington.
  • Washington, unlike California, is not a review state. If you were in California and trying to decide where to incorporate, California or Delaware, you would choose Delaware to avoid the practice of the California Secretary of State of reviewing and approving filings before they are effective (which can slow down a financing). Washington, like Delaware, is not a state which reviews filings with the Secretary of State before they are effective. The popularity of Delaware as a place to incorporate has a lot to do with the unpopularity of California as a state of incorporation.

Washington is less expensive

  • If you are headquartered in Washington, incorporating in Washington will be less expensive than incorporating in Delaware.
  • If you incorporate in Delaware but do business in Washington, you will have to:
    • first, pay Delaware incorporation fees;
    • then pay to obtain a certificate of good standing from Delaware;
    • then pay to qualify your Delaware corporation to do business in Washington; and
    • then on an ongoing basis you will have to pay Delaware franchise taxes and registered agent fees to a registered agent in Delaware, in addition to ongoing fees you will have to pay to the State of Washington.
  • Delaware’s annual franchise fees can be significantly greater than Washington’s annual fee (Washington’s annual fee is less than $100).
  • If you want to see how much more Delaware can cost you in annual fees, you can run example calculations here.

Incorporating in Washington won’t hold you back in obtaining venture capital financing

  • Washington corporations regularly receive funding from venture capital firms (as reported in the media). (I have yet to hear in my 12+ year legal career a funding source say they wouldn’t fund a Washington corporation unless it reincorporated in Delaware–but if one did it would not be a big deal to reincorporate.) Microsoft is a Washington corporation (significantly, it reincorporated to Washington from Delaware).
  • In fact, if you study the companies reported in the news media that are reported to have raised funds or done M&A deals and look and see on the Washington Secretary of State’s web site where those corporations are formed (http://www.secstate.wa.gov) most Washington-based companies in the news for raising money or doing M&A deals appear to be Washington corporations (with Delaware running a close second from the sampling I’ve done).
  • If you subscribe to our Funding Update Newsletter (you can do this by going to the front page of this blog and hitting the button titled, Subscribe to Funding Update, and then sending the email that you are prompted to send), you will see that Washington corporations regularly close angel and venture financings. It is not an impediment at all to be a Washington corporation.

You avoid potential legal costs down the road

  • If you do incorporate in Delaware and happen to run into an issue which is a novel or complex issue under Delaware law in the midst of a transaction, you may have to retain separate Delaware counsel at additional expense for legal opinions. This is a cost that you would avoid if you were incorporated in Washington and working with Washington counsel on your transactions.

Shutting Down a Washington corporation Is Easier and Less Expensive

  • It is not uncommon to form a corporation, work on it with your co-founders for a while, and the decide to pack it in.
  • It is easier and less expensive to shut down a Washington corporation than a Delaware corporation.
  • In Washington, for example, this may cost next to nothing. In Delaware, you will have to file your back taxes, if you are behind, and this can cost several thousand dollars.

Reincorporating in Delaware is not a big deal if you are forced to do so

  • If you do run into an investor who will write you a multi-million dollar size check, but only if you are incorporated in Delaware, it is not a big deal to reincorporate.
  • http://www.wac6.typepad.com William Carleton

    Joe, thanks a ton for this. As you know, the question is coming up a lot as we work more and more with entrepreneurs who are going through programs and accelerators that are “multi-state” in outlook and tend to bring a Delaware bias. It’s good to be thoughtful about this though and your post will greatly help facilitating these conversations in Seattle.

  • http://twitter.com/asherbearman Asher Bearman

    This is a great post and I generally agree, but will add a few points:

    1) I agree CA is a big pain and can cause closing delays.
    2) WA is not just less expensive than DE, it is FAR less expensive, particularly now that DE has increased its rates. It’s not even close. I have early stage VC companies that are considering reincorporation to WA, which is an expensive process, just to get their filing fees under control.
    3) DE is comfortable for investors. They know it without having to check or worry that the company is going to trick them somehow. I agree that it’s probably not a deal killer, but it makes the conversation more difficult…which means more expensive.

    As you know, we have also addressed this issue on our VC blog here:

    http://www.theventurealley.com/startups/delaware-versus-washington-where-should-i-incorporate-my-startup/

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  • Jason

    What an idiot.

    If your home base is either in WA or CA, you still have to incorporate in those states as a foreign DE entity to avoid tax consequences of where income is earned. Ever hear of nexus?

    Speak to a CPA when incorporating, not an attorney. The CPA will charge you less and do a more thorough assessment beyond incorporation fees.

    • Anonymous

      Jason, you don’t have to incorporate in multiple states. You incorporate in one state and then you may have to qualify as a foreign corporation if you do business in other states. So, I think you make my point. If you are headquartered in WA, incorporate here.

  • Madhu Singh

    Great Post. I feel the same way as you do and fortunately have convinced many startups to incorporate here in the State of WA for the very reasons you stated. Thank you.

    • joewallin

      Thank you Madhu! How are you?

  • unsu pak

    What about this http://www.nolo.com/legal-encyclopedia/llc-protection-members-personal-debt-washington.html where the article claims that WA has the weakest LLC liability protection laws, which make WA LLC the least desirable?

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  • http://blog.jparkhill.com Jay Parkhill

    I like this post, Joe. It can be hard to keep good DE and [home state] formation documents up to date. Many attorneys I know rely on one state or the other because it is hard to stay on top of two sets of forms, and hard to tell what is objectively the best for any client. Kudos for making the effort.

    CA may technically be a review state but I have never actually seen them review anything. They are just very slow. OTOH I am told New York rejects most filings twice based on substantive review before accepting the filing.

    • http://startuplawblog.com/joewallin Joe Wallin

      Jay, it is not really a sore subject for me or anything (lol), but the dominance of California in the startup world really drives a lot of this DE is so great thinking. And it is true that DE is fine–but if CA was not so terrible, DE wouldn’t be so dominant. I have had CA reject filings, after paying $500 for pre-review and multiple sets of lawyers from great law firms review and approve of the docs. So, it is just sort of ridiculous. But it is not a sore subject foe me or anything like that. :]

      • http://blog.jparkhill.com Jay Parkhill

        I like your perspective. I always figured DE is dominant because public companies have gravitated there, and the thinking has trickled down to startups.

        • http://startuplawblog.com/joewallin Joe Wallin

          Yeah…maybe you are right…But lately I have been thinking that no one in Silicon Valley recommends a CA corp for an angel or venture backed startup. True?

          • http://blog.jparkhill.com Jay Parkhill

            Yes, true. DE fees are about $1000/year (franchise tax and resident agent). If you need to file Articles quickly in CA it costs $500 in expedited filing fees so most of the savings is gone. Agree with you that CA is lousy for angel/VC-backed companies.

            ———
            Jay Parkhill | Parkhill Venture Counsel | Tel. 415 963-4114 | Fax 415 963-4186
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