For startups planning to seek venture capital financing in the United States, it’s often most beneficial to form a C-corporation in Delaware, regardless of the company’s headquarters location. The “C” in C-corporation refers to subchapter C of the United States Internal Revenue Code, the federal tax statute under which C-corporations are taxed.
Delaware is favored for incorporation because of its well-established, flexible corporate laws and a court system experienced in handling business issues. Additionally, its Secretary of State’s office is efficient, capable of processing business filings quickly and with fewer obstacles compared to many other jurisdictions.
C-corporations offer limited liability protection, flexibility in raising capital, the ability to issue multiple classes of stock, and relative ease in issuing equity-based compensation to employees.
Venture capital investors prefer to invest in Delaware C-corporations because they are familiar with the entity type and its legal and tax obligations. Many venture capital firms are even restricted from investing in non-corporations, such as LLCs, due to tax considerations.
Investors may require a company that is not organized as a Delaware C-corporation to convert into one as a prerequisite to their investment. To avoid potential transaction delays and additional legal fees, it’s advisable to establish and operate as a Delaware C-corporation from the outset.
If a company anticipates generating most of its revenue outside the United States, it might be tax-advantageous to establish the parent entity in a non-US jurisdiction, like the Cayman Islands, prior to forming any entity in the United States. However, the costs of maintaining an offshore entity and managing a complex organizational structure should also be taken into account.
If you’re uncertain whether a Delaware C-corporation is the right choice for your circumstances, you should consult with legal and tax professionals before incorporating.