Choosing where to incorporate in the United States can significantly affect the trajectory of a business. Delaware is a jurisdiction of choice for over 68% of Fortune 500 companies and Delaware incorporation appeals to businesses of all sizes – from startups to multinational corporations.

Delaware's corporate laws, a robust legal system, investor preference and certain tax advantages are just some of the reasons why businesses choose to incorporate in that state. Understanding these benefits, their implications and how they may align with a business’s goals can help companies to make informed decisions about the corporate structure.

Here is an overview of the process of forming a Delaware C corporation, the benefits of incorporating in Delaware and other important factors that businesses should consider.

What's in this article?

• What is a C corp?
  
• What is a Delaware C corp?
  
• Benefits of incorporating in Delaware
  
• How to start a Delaware C corp
  

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 rather than a type of business entity. A C corp is a separate legal entity from its owners, as defined under Subchapter C of the US 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 event of debt or legal judgements against the corporation. This means that their personal assets – such as houses, cars and personal bank accounts – are protected. This limited liability is one of the main reasons why many entrepreneurs choose a corporate structure.

• 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. And there are no restrictions on the number of shareholders, which can enable C corporations to attract investment and grow larger.

• Perpetual existence
  C corporations can exist in perpetuity, independent of their founders or current shareholders. This continuity of existence means that 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's direction. Meanwhile, the corporation's officers (CEO, CFO etc.) handle 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, making the C corp the preferred structure for venture capital firms and enabling them to raise large amounts of capital.

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 C corp?

A Delaware C corporation, often referred to as a Delaware 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 US 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 other benefits that are specific to Delaware C corporations:

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

• Business-friendly legal system: Delaware houses a unique court called the Court of Chancery, which specialises in corporate disputes. The court operates without juries. Instead, experienced judges make determinations, allowing for faster and more predictable outcomes.

• 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: Delaware provides a level of privacy to corporations that is not available in many other states. It doesn't require officer or director names to be listed on the formation documents, thus helping to preserve their privacy.

• Investor preference: many investors, particularly venture capitalists, have a strong preference for Delaware corporations because of the 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's 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 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. Because every business is unique, it is important to seek guidance from legal and tax professionals during this process to align the corporate structure with the objectives of the business. Establishing a strong legal foundation will support the business's sustainability and scalability.