Updated: Jan 5, 2021
Historically, Delaware has been well known as the preferred jurisdiction for incorporating a business. This is primarily due to Delaware’s longstanding corporate laws, and extensive case law interpreting shareholder rights and director’s liabilities. Companies that anticipate offering shares to private investors will often choose Delaware because there is a relatively great deal of certainty as to director liability and shareholder rights.
Delaware also offers a certain degree of privacy, meaning that the directors or governing persons are not required to be identified in the public record at the time of incorporating, and the shareholders are not a matter of public record ever. However, Delaware does have corporate income tax for revenues earned in the state, or alternatively a franchise tax based on revenues or the number of authorized shares. Overall, Delaware is considered a favorable state due to its relatively light taxation, privacy, and the legal tradition of corporations.
Nevada is another frequently used jurisdiction for forming a company for similar reasons to Delaware. However, Nevada’s mandatory annual business license currently costs $500/year. This fee is not generally a deciding factor, but merely a point to be aware of when all other factors are equal.
While not as well known, Washington State is also a favorable choice as a jurisdiction for incorporation. Washington State has the same level of privacy as Delaware and Nevada, but the state does not impose corporate income tax or personal income tax. Instead, Washington has a Business & Occupation tax, which is a relatively small percentage tax on revenues earned within the state, where the rate or percentage depends on the industry of the business. The annual fee for maintaining a corporation in Washington is a flat fee of less than $100/year, and there is no franchise tax like in Delaware and in other states.
When advising Canadian clients on the preferred state to incorporate, often the decision is made on practical considerations. For a business located in British Columbia or Alberta, Canada, Washington State has the practical advantage of being nearby. Its proximity makes dealing with business matters such as banking, establishing a mailing address and virtual office, and shipping logistics easier to manage.
Lastly, another important practical consideration is defending a US company in any business litigation. A plaintiff suing a corporation can choose the state where the corporation was incorporated. This means a business on the west coast that incorporates in Delaware may have to travel to Delaware to defend the company in court.
When all other factors are equal, this practicality may tip the balance towards making Washington a preferred choice of state for Canadians incorporating in the U.S.
** Disclaimer: This article contains only general legal information and is not intended to replace legal advice specific to the reader’s situation. We strongly encourage you to seek legal advice from your lawyer before acting based on any information given here.