For startups, your for-profit, state-law entity choices are (1) LLC or (2) corporation. If you’re a Startup, we’re assuming you have plans to (either now or in future) issue equity compensation and/or seek investors. If this is the case, almost all Startups in this scenario choose a corporation that is taxed as a C corporation.
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Why would most startups choose a C Corp? Don't C corporations have the dreaded “double tax?”
They do, but the only way you get double-taxed is if you have profits. And if you’re a startup, in virtually every case, you won’t start off profitable. So then that issue is not a problem for you until you’re profitable (which often takes years for startups).
The biggest exception is if you’re going to invest a lot of your money in the first few years of the business but have someone else (you if you have another source of income, your spouse, etc.) that you can use the losses for. In that case, explore our LLC vs. S Corp comparison to understand which option is smarter for your startup. For startups considering the S Corp election process, there may be tax advantages to taking early losses with some exceptions. And can definitely take it as a loss with an LLC.
But if you’re in that scenario, talk to an attorney -- if you have a ton of money to invest in the company, it’s worth talking to an attorney to find out how to minimize the taxes you pay.
Exceptions aside, C corporations are best for startups particularly for three reasons:
So then the issue is -- where should you form your C Corp? In general, for startups, Delaware is best. There are a lot of reasons for this (many of which are probably overblown and don't apply to most businesses), but it's simply the standard that VCs like to see.
When deciding where to form your C Corporation, Delaware often emerges as the top choice for startups. This preference is largely driven by venture capitalists who favor Delaware-incorporated companies. But why is Delaware so popular?
Delaware offers a well-established body of corporate law that provides clarity and predictability, crucial for startups navigating complex legal landscapes. The Delaware Court of Chancery specializes in corporate matters, ensuring that any legal disputes are handled by experienced judges rather than juries. This can lead to faster and more reliable resolutions.
Delaware's flexible corporate statutes allow for greater freedom in structuring your company. This flexibility can be a significant advantage as your business grows and evolves. Additionally, the state offers privacy benefits, as it does not require the disclosure of officer or director names in formation documents, providing an extra layer of confidentiality for your startup's leadership.
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Delaware's reputation as a business-friendly state is bolstered by its efficient and responsive Secretary of State's office, which facilitates quick and straightforward incorporation processes. This efficiency can be particularly beneficial for startups that need to move quickly to secure funding or begin operations.
The state also offers a range of tax benefits, including no state corporate income tax on goods and services provided by Delaware corporations operating outside of Delaware. This can result in significant cost savings for startups that do not have a physical presence in the state.
Delaware's legal framework is highly regarded for its adaptability and innovation. The state's General Corporation Law is frequently updated to reflect the latest developments in corporate governance and business practices. This proactive approach to legislation helps to create a stable and supportive environment for businesses of all sizes.
Delaware's business community is robust and well-connected, providing ample opportunities for networking and collaboration. The state is home to numerous professional service providers, including law firms, accounting firms, and consultants, all of whom are experienced in working with Delaware corporations. This concentration of expertise can be invaluable for startups seeking guidance and support as they navigate the complexities of building and scaling their businesses.
In summary, while the benefits of incorporating in Delaware may be more pronounced for some businesses than others, the state's combination of legal clarity, judicial expertise, flexible statutes, privacy protections, tax advantages, and supportive business environment make it a compelling choice for many startups. By choosing to form your C Corp in Delaware, you can position your company for success and growth in a competitive and ever-evolving marketplace. Not sure if a C Corp in Delaware is what you need? Check out our comprehensive guide to entities.
The biggest question now is, "Do you need a lawyer to start a business?” For most businesses and in most cases, you don't need a lawyer to start your business. Instead, many business owners rely on Legal GPS Pro to help with legal issues.
Legal GPS Pro is your All-In-One Legal Toolkit for Businesses. Developed by top startup attorneys, Pro gives you access to 100+ expertly crafted templates including operating agreements, NDAs, and service agreements, and an interactive platform. All designed to protect your company and set it up for lasting success.
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Chris Daming, J.D., LL.M. : Aug. 6, 2024
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