Choosing where to incorporate can significantly affect the trajectory of your business. Delaware is the preferred jurisdiction for over two-thirds of Fortune 500 companies and Delaware incorporation appeals to businesses of all sizes – from startups to multinational corporations.

Reasons why businesses choose to incorporate in Delaware include the state's corporate laws and robust legal system, certain tax advantages and investor preference. Understanding these benefits, their implications and how they may align with your business goals can help you make informed decisions about your corporate structure.

Below, we'll explain how to form a Delaware C corporation, the benefits of incorporating and conducting business in Delaware and other important factors that businesses should consider.

What's in this article?

• What is a C corp?
  
• What is a Delaware corporation?
  
• Benefits of incorporating in Delaware
  
• How to start a Delaware C corp
  
• How Stripe Atlas can help
  

What is a C corp?

A C corp is a legal term that refers to a specific type of tax status conferred upon a corporation by the IRS. A C corp is a separate legal entity from its owners, as defined under Subchapter C of the Internal Revenue Code. This distinction affects several other key characteristics of C corps:

• Limited liability
  Owners or shareholders, are shielded from personal liability in the case of debt or legal judgments against the corporation. This means their personal assets, such as houses, cars and personal bank accounts, are protected. This limited liability is one of the primary reasons many entrepreneurs choose to form a C corp.

• Ownership flexibility
  A C corporation's ownership is divided into shares of stock. This system allows for changes in ownership – shareholders can easily transfer, sell or give away shares. There are no restrictions on the number of shareholders, which can enable C corporations to attract investment and grow.

• Perpetual existence
  C corporations can exist in perpetuity, independent of their founders or current shareholders. This means the corporation can outlive its original owners, making it an attractive option for founders who want their business to continue operating even after they are no longer involved.

• Double taxation
  This corporate structure has a significant drawback: double taxation. The corporation pays corporate income tax on its profits. Then, if any after-tax profits are distributed to shareholders as dividends, the shareholders must also pay personal income tax on these dividends. This can lead to a higher effective tax rate on corporate earnings.

• Management structure
  C corps must have a formal structure of governance in place. A board of directors, elected by the shareholders, oversees major business decisions and sets the business' direction. The corporation's officers (CEO, CFO, etc.) handle the daily operations.

• Fundraising and investment
  C corporations are particularly attractive to investors. These corporations can raise funds through the sale of various types of equity and can accommodate complex capital structures. Many venture capital firms prefer the C corp structure.

All US corporations are initially designated as C corporations as a default tax classification, unless they do one of two things:

• File Form 2553 with the IRS to opt for S corporation status, which allows for pass-through taxation and restricts the number of shareholders.
  
• File a 501(c) application with the IRS for non-profit status, becoming exempt from federal income tax.
  

What is a Delaware corporation?

A Delaware corporation, which means a Delaware C corporation, is a business entity that has chosen to incorporate under the laws of the state of Delaware and is taxed under Subchapter C of the Internal Revenue Code. Delaware is a popular choice for incorporation because of its flexible, pro-business statutes and well-established body of case law.

Benefits of incorporating in Delaware

Similar to other C corporations, Delaware C corporations offer limited liability protection. The shareholders of a Delaware C corporation are shielded from personal liability for corporate obligations and debts. Here's an overview of the benefits specific to Delaware C corporations:

• Advanced, flexible corporate laws: The Delaware General Corporation Law (DGCL) is highly sophisticated and adaptable and is updated continuously to reflect evolving business practices and legal interpretations.

• Business-friendly legal system: Delaware's Court of Chancery specialises in corporate disputes. The court operates without juries. Instead, experienced judges make determinations, allowing for faster and more predictable outcomes for Delaware businesses.

• Precedent-setting case law: Delaware has an extensive history of resolving corporate legal matters and it has a vast body of case law that brings predictability and stability to legal proceedings.

• Privacy considerations: By not requiring officer or director names to be listed on the formation documents, Delaware provides a level of privacy to corporations that is unavailable in many other states.

• Investor preference: Many investors, particularly venture capitalists, prefer Delaware corporations because of the state's well-understood and favourable legal environment.

• Management-friendly policies: Delaware corporate law is often seen as being good for management. For example, it allows for single-person corporations, in which one person can be the only director and hold all offices.

• Tax advantages: Delaware offers certain tax advantages. For instance, there is franchise tax, but no state corporate income tax for companies that are formed in Delaware but do not transact business there.

• Ease of incorporation: the state of Delaware has an efficient and expedient incorporation process.

How to start a Delaware C corp

Starting a Delaware C corporation involves several steps:

• Choose a name for your corporation: Your business name must be unique and not in use by another business in Delaware. You can check name availability through the Delaware Division of Corporations website.

• Appoint a Delaware registered agent: Delaware requires all corporations to have a registered agent with a physical address in Delaware. This agent is responsible for receiving official documents and legal papers on behalf of the corporation.

• File the certificate of incorporation: you'll need to file this document with the Delaware Secretary of State. It includes key details about the corporation, such as its name, the address of the registered agent and the number and value of authorised shares of stock.

• Create corporate bylaws: these internal rules govern your corporation. They cover topics such as the structure of the corporation, shareholder rights and how meetings are conducted.

• Appoint directors and officers: directors oversee the corporation's major decisions, while officers manage the day-to-day operations.

• Issue stock: this step involves issuing shares to the initial owners of the corporation.

• Obtain an employer identification number (EIN): this unique number assigned by the IRS is used for tax purposes. You can apply for an EIN on the IRS website.

• Comply with other tax and regulatory requirements: depending on the nature of your business and where you operate, you may need to register for state and local taxes, obtain business licences and permits or comply with other regulatory requirements.

• File an annual report: Delaware requires corporations to file an annual report and pay a franchise tax each year.

While there are many benefits to forming a Delaware C corp – including a robust legal environment, favourable tax structures and investor preference – the process also involves important legal, tax and business considerations. Seek guidance from legal and tax professionals during this process to align the corporate structure with your business objectives.

Angel investors vs. other types of investors

Before pursuing funding from angel investors, familiarise yourself with other types of startup investors. Here's an overview of investment options:

• Venture capitalists: Venture capitalists (VCs) are firms or individuals that invest in startups showing strong potential for growth, usually in exchange for equity. Unlike angel investors, they typically invest during the later stages of a startup's development, after the business has shown some market traction. VCs invest larger sums of money than angel investors and are usually more involved in the direction of the company. They seek substantial returns and typically have a more aggressive view toward scaling the business and achieving an exit within a specific timeframe.

• Seed funds: Seed funds are specialised VC funds that focus on early-stage investments, often before angel investment and larger VC rounds. They invest in startups that have moved past the conceptual stage and have a minimum viable product (MVP) or some initial traction.

• Incubators and accelerators: These programs support early-stage companies through education, mentorship and financing. Incubators focus most often on the initial development phase, helping entrepreneurs turn ideas into a viable business. Accelerators, on the other hand, look to scale up the growth of existing companies over a short period of time.

• Corporate investors: Some corporations invest in startups to access innovative technologies, enter new markets, or nurture strategic partnerships. These investors can offer ample resources, but they might seek more than just financial returns, such as an ownership stake in the technology or control over the company's direction.

• Crowdfunding: This involves raising small amounts of money from a large number of people, typically through online platforms. Crowdfunding can be a good option for startups that want to validate their product with a broad audience, interact with potential customers and raise funds without giving up equity or incurring debt.

• Government grants and subsidies: In some sectors – particularly those involving scientific research, clean technology, or social impact – government grants and subsidies can provide funding without diluting equity.

• Peer-to-peer lending and debt financing: Debt financing includes loans from financial institutions or peer-to-peer lending platforms. This type of financing is typically more challenging for early-stage startups to secure and it obligates a startup to repay the loan, with interest, but it doesn't dilute ownership.

• Family offices: High net-worth families often have private wealth management advisory firms, known as family offices, that directly invest in startups. These investors can provide substantial funding and might be interested in longer-term investments compared to traditional VCs.

• Angel groups and syndicates: Unlike individual angel investors, angel groups or syndicates pool resources to invest in startups. These groups can provide larger sums of capital and combine the expertise and networks of multiple investors.

Each type of investor offers different advantages, expectations and levels of involvement. Startups should carefully consider their stage of development, industry, funding needs and the kind of strategic relationships they want to grow before deciding which type of investor to work with.