Insight Idaho or Delaware? That is the Question

The words after “to be or not to be” from Shakespeare’s Hamlet are:

“Whether ’tis nobler in the mind to suffer the slings and arrows of outrageous fortune, or to take arms against a sea of troubles, and by opposing end them.”

The question of whether to incorporate in Idaho or Delaware is perhaps not so infused with existential angst, yet Idaho corporate practitioners still answer this question so frequently that it seems almost as familiar as Shakespeare’s words.

The greater breadth and depth of court decisions in Delaware compared with other states, its “expert” chancery court, and its deference to corporate board decision-making are all reasons for large, especially publicly-traded, corporations to incorporate in Delaware. Incorporating in Delaware earned additional notoriety recently, with a front-page exposé in the New York Times asserting that Delaware is a “tax haven” because the identity of incorporators and officers can be hidden by use of a corporate registered agent. See New York Times Sunday, July 1, 2012, Business Section, page 1.

This newsletter covers three points that are more relevant to Idaho businesses and to Idaho attorneys who advise them. First, in a cost comparison, the bottom-line is that Idaho is less expensive, especially on an ongoing basis because of the annual Delaware franchise tax. Second, differences between Idaho and Delaware’s corporate statutes can be of importance, especially to a closely held corporation, including those operating in Idaho. Is the extra expense worth it? Yes, in certain circumstances. Third, a practice pointer on coordinating the company’s documents with the Delaware law if you decide to reincorporate an existing Idaho corporation in Delaware.

1. Costs of Incorporating:

1 Assumptions – ABC Company:

a) Authorized Shares: 1,000

b) Par value per share: $.001

c) Gross Assets: $1,000,000

2 Estimated. Calculation by “assumed par value capital method.”

3 Estimated. Calculation by “authorized shares method.”

4 Fee varies if increasing stock.

5 Includes $13 computer access fee.

2. Specific Provisions

The Idaho Business Corporation Act (IBCA) has a defect that the Delaware General Corporate Law (the DGCL) does not have. This is important to a shareholder who controls 50% or more of the common stock but not 100%. Under DGCL, the majority owner(s) can act by a written consent without a meeting. Under IBCA, a written consent of shareholders is valid only if signed by 100% of shareholders. If the consent is not unanimous, the Idaho corporation must go through the time, expense, and formality of a special meeting, even if the vote is 99% to 1%. Thus, a corporation that has a controlling owner or group of owners is well-advised to incorporate in Delaware for the ease of conducting shareholder actions.

3. Practice Pointer

Our office recently incorporated an Idaho business under IBCA after consultation with the client because the client sought the cost-savings of incorporating in Idaho and acting as the registered agent, and the client was not initially expecting capitalization from outside sources. In time, the business progressed to the need for venture funding – a typical trigger point for migrating to Delaware, so we reincorporated the company in Delaware. In reviewing the work, I noticed that the Delaware company had adopted the same by-laws as the Idaho company, which mirrored IBCA, and therefore contained the cumbersome Idaho limitations on unanimous consent. We quickly made the change to adopt by-laws consistent with the Delaware provisions so that we captured the benefits we were seeking!

If you would like more information about this topic or other legal issues, please contact a member of our Business Group or call 208.344.6000.