Why Startups Prefer Delaware C Corps - Benefits, Explained

Why Startups Prefer Delaware C Corps

What are C-corporations?

The main distinguishing feature of C-corp or C-corporation from other entities is that owners or shareholders are taxed separately from the corporation. This type of organisation is limited liability in nature, meaning, the maximum that investors and business owners can lose in the event of a business failure is the money they invested. Hence their personal property would be untouched in the settlement of the corporation's debt.

Why Delaware C Corps? 

Many founders, in the present day scenario, choose to incorporate as a Delaware C corporation. To understand why, let's first analyse what a Delaware C corp is.

Delaware has earned an international reputation as a corporate paradise and is “home” to corporate behemoths. 

Delaware State has a hospitable environment for corporations. Delaware has an edge over other states in terms of Delaware C-corp tax benefits, privacy, fundraising and ownership benefits, compliance benefits in terms of Delaware C-Corp filing requirements, and more, and the corporation courts that resolve corporate disputes relatively quickly. 

C- corp's benefits are enhanced in the state of Delaware when combined with state-specific benefits. Delaware's corporation-friendly laws make it a popular organisation type in the USA.

Delaware C corporation benefits 

Delaware C corps is preferred type of organisation for a reason. The reason being, the myriad benefits attached to it such as - 

  • Benefits related to business-friendly Delaware corporate laws - Delaware's well-established and business-friendly legal system is made to offer a clear and adaptable environment for firms to function. Delaware has the most advanced and up-to-date case laws and experienced judges who specialise in corporate law cases. 
  • It offers businesses incomparable tax savings. How? You ask. The absence of state sales tax on intangible personal property and inheritance tax, as well as the fact that corporations registered in Delaware but operating outside Delaware state, are not subject to state income tax and do not require a business license in Delaware, Delaware C-corp taxes structure contribute significantly to tax savings.
  • Low cost in forming the corporation, convenience benefits, ease of raising capital, convenient Delaware C-corp filing requirements, and simple structural advantage are among the other benefits.

Why is Delaware C Corp the best choice for your startup? 

Tax incentives: Delaware C -Corp taxes have reduced rates in comparison to partnerships, sole proprietorships, and S-corps. Significant tax savings are due to the absence of several taxes, including those on capital gains or stock transfers, unitary tax, value-added taxes on business transactions, inheritance tax, and taxes on inventory.

Helps in raising capital: As Delaware C-corps form of organisation enables greater corporate ownership, venture capitalists and investors prefer to invest in C corps over S corps.It is simpler for C firms to raise money, issue bonds, and obtain loans since they are able to provide a variety of stock options.

Ownership flexibility: There aren't any significant restrictions on who can hold shares of a C corporation, therefore individuals as well as organisations inside and outside the country can become owners of C-corp

Limited Liability Protection: Limited liability protects the personal assets of owners and shareholders of a C corporation in the event that the business incurs debts or faces legal troubles.

Privacy: The protection of company privacy is a benefit of establishing a corporation in Delaware. Companies are not required by the State to disclose officials' residences or other personal information, including shareholders' names and addresses. When submitting corporation paperwork, only the registered agent's name and address are needed.

Expediency and simple structure: Delaware is famously known for same-day business filings. In some cases, the incorporation procedure can be finished in under an hour. Delaware law makes it simpler by allowing only one person to hold multiple positions within the company, including those of officer, director, and shareholder. This is usually only possible in other states with sole proprietorships or LLCs. Delaware C corporations do not have complex organisational structures.

Corporation courts: Corporate cases in Delaware are settled by the Court of Chancery, a court made up of judges who specialise in corporate law, as opposed to a typical trial system. Normal civil litigation may take years to be resolved, but since Delaware uses judges rather than juries and gives corporate-related issues priority, similar situations can be resolved more quickly.

Low costs of incorporation: Delaware's exceptional feature of low business costs and non-cumbersome Delaware C-Corp filing requirements is what attracts companies to set up business there. Delaware has the lowest operational costs, with the cost being 25% less than the national average. You can find detailed instructions about filing paperwork about US tax and compliance on Inkle.

Delaware C Corp vs other alternatives

C-Corp vs LLC  

Basis of DistinctionC-CorpLLC
Equity TypeGives out shareholder’s stock (can be common or preferred).LLCs give their shareholders equity via profit interests. 
LiabilityIn general, stockholders are shielded from liability for corporate obligations.Managers and members have limited liability for LLC’s debts.
Tax ConsiderationsTaxed at two levels: entity level and shareholder level.Taxed at the member level only.

For the majority of firms who do not want to bring in outside investors, the Delaware LLC is typically the best choice. This is primarily due to Delaware LLCs being more adaptable and manageable than C-corporations. A Delaware LLC can always change its status in the future to a Delaware C-Corporation. The founders may be better off starting their business as a Delaware LLC and changing it to a C-Corp once they are ready to raise capital, depending on the business's projected rate of growth.

C-Corp vs S-Corp

Basis of DistinctionC-CorpS-Corp
Equity TypeRequires at least one stockholder and there is no restriction on type of owners.Ownership is restricted to US individuals and trusts and can only have one to 100 owners.
Tax considerationsTaxed at two levels: entity level and shareholder level.Treated as pass-through entities. Profits and losses pass-through to the stockholders and such items shall then be reported on income tax returns.
Equity TypeGives out shareholder’s stock (can be common or preferred).Taxed at the member level only.

How to form a Delaware C corp?

The steps on how to form a Delaware C-Corp are as follows:

Step 1: Choose the corporation name - The Delaware Secretary of State's naming standards must be followed while naming a corporation. The name of a corporation shall have an approved corporate ending. A corporation's name cannot contain a certain set of terms. Example - Bank or trust.

Step 2: Choose a Delaware Registered Agent - Most businesses that are incorporated in Delaware are not actually based there. Companies based outside of the Delaware state are required by law to select a Delaware registered agent. A registered agent is responsible for receiving significant legal notices. 

Step 3: File a certificate of incorporation - The Certificate of Incorporation must then be submitted to the Delaware Secretary of State. Delaware Certificate of Incorporation includes: Name of the corporation, name, and residency of the registered agent, the total amount authorised stock, and the par value per share.

Step 4: Prepare Internal documents - A startup's founders will need to create specific internal paperwork. These Delaware C-Corp filing requirements consist of:  The Executed Minutes of Incorporation for the appointment of one or more directors, company rules to govern internal affairs, stock certificates issued to shareholders, unanimous action of directors to elect officers and issue stock to shareholders.

Step 5: Draft a stockholder agreement  - A sort of internal business contract known as a stockholder agreement defines the authority and rights of stockholders. A stockholder agreement may impose limitations on the timing, manner, and recipients of stock transfers. A stockholder agreement should be present in any corporation with several shareholders. 

Final thoughts 

The majority of advantages are available to businesses operating in Delaware. Delaware has become a popular place to form corporations, but doing so necessitates that firms have a thorough understanding of Delaware corporate issues, taxation systems, company laws, and much more. 

A Delaware C-Corp isn't necessarily the ideal option for all kinds of business.  A small business might not be able to fully benefit from the Delaware C-Corp. A few of the additional legal obligations for C-Corps, such as convening an annual shareholder meeting, may also be a hardship to the company.

It might be challenging to manage a Delaware C Corporation, but with the correct preparation and coordination, it can go smoothly. Consistently familiarise yourself with the state's corporation bylaws and tax rules, and if you have any questions, speak with Inkle. You'll be well on your way to managing a prosperous Delaware C corporation by adhering to these simple suggestions.

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