Delaware C Corps allow for easier and faster access to capital since they are not subject to as many regulations. ~ Adil Advani, MyPrep
What is one reason why investors prefer Delaware C Corps for startups?
To help you appreciate why investors prefer Delaware C Corps for startups, we asked investors and legal professionals this question for their best insights. From providing low cost for business startups to having no tax on profits in initial years, there are several reasons why investors prefer Delaware C Corps that may help you make informed investment and startup decisions.
Here are nine reasons why investors prefer Delaware C Corps for startups:
- Low Cost for Business Startups
- Lawyers Are Well Acquainted With Delaware Case Law
- More Leverage for Investors
- Investor Privacy and Anonymity
- Proven Security and Dependability
- Statutes for Incorporation Are Flexible
- Fewer Restrictions for Faster Access to Capital
- Passive Foreign Investment Corporations Are Standardized
- No Tax On Profits in Initial Years
Low Cost for Business Startups
One main reason why investors prefer Delaware C Corps is because they are exempt from state income and franchise taxes which makes them an attractive option for startups that are looking to expand nationally or internationally.
Delaware has one of the lowest business tax rates in the nation, at just 3.97%. Additionally, the state has an attractive framework for intellectual property protection, and it offers a number of other business-friendly policies, such as simplified incorporation procedures and a well-developed investor-protection scheme.
Paw Vej, Financer.com Ltd
Lawyers are Well Acquainted with Delaware Case Law
Every investor chooses Delaware C Corps for their startups because the lawyers are well-acquainted with the Delaware Case law, which could save you a lot of money. The volume of organizations added in Delaware coupled with courts focused on corporate cases implies that there are various case laws. In addition, out-of-state solicitors and courts will often cite cases from Delaware as a criterion in their administration. Consequently, organizations can benefit from established business laws and know how to circumvent litigation and other disputes with maximum certainty. As various businesses are being performed across state lines, the acquaintance with Delaware C Corps is essential.
Caroline Lee, CocoSign
More Leverage for Investors
It’s all about flexibility. That’s why Delaware C Corps are almost always preferred by investors and venture capitalists. One of the best features is the startups’ ability to offer preferred stocks (vs. just common stock under S corporation). This is highly desirable of course as it gives the investors more leverage and maneuverability. To name just a few; preferred stocks can give the stakeholder higher dividends, more than one vote (per share), as well as the ability to convert it to common stock if/when the company goes public.
Peter Bryla, ResumeLab
Investor Privacy and Anonymity
Delaware C Corps are one of the few ways investors can maintain their privacy and anonymity, thanks to the state laws pertaining to shareholders. Delaware does not require their C Corporations to publicize their shareholder’s personal information, like full names and addresses. When a business files papers of incorporation in Delaware, they only need to share the name and address of the registered agent and publicize and directors’ information.
John Li, Fig Loans
Proven Security and Dependability
Investors are drawn to Delaware C Corps for startups because it’s been the leader of American incorporation since the 1800s. Though the history bit is fun, the perks of that history are most appealing. Delaware’s court system is so well-experienced in corporate judicial decisions that they’ve created a separate court for corporate law cases — the Court of Chancery. These judges have seen it all, which gives businesses more security and dependability in the system that legal issues will be dealt with swiftly and fairly. As a result, investors see these corporations as more dependable investments, too.
Samuel Devyver, EasyLlama
Statutes for Incorporation are Flexible
The Delaware Corporate Statutes Are Flexible. This, in my opinion, is one of the reasons why investors prefer Delaware C Corps for startups because the Delaware General Corporation Law (“DGCL”) allows for a great deal of flexibility in the organization of a corporation as well as the rights and duties of board members and shareholders. For example, Delaware allows a single person to serve as the sole director, shareholder, and officer of a Delaware corporation, whereas some other states require at least three people to fill those roles. The DGCL is also regularly updated to reflect new court and business developments. Despite the fact that many Delaware statutes have been imitated in other states, the extensive case law mentioned above is a huge asset when determining how a Delaware statute is likely to be interpreted.
Dr. Frederik Lipfert, VPNCheck.org
Fewer Restrictions for Faster Access to Capital
Delaware C Corps allow for easier and faster access to capital since they are not subject to as many regulations. They help startups more easily find investors for their funds because of the lack of restrictions on who can invest in a Delaware corporation, which is something other states do regulate.
Adil Advani, MyPrep
Passive Foreign Investment Corporations Are Standardized
The root issue is that the US government does not want investors putting their cash into companies overseas, and not reporting this cash. So to ensure this does not happen, you may have to file PFIC paperwork for your international investments.
PFIC stands for Passive Foreign Investment Corporation with strict reporting rules by the IRS. A foreign corporation is a PFIC if, for its tax year: (1) at least 75% of its gross income is passive income (Income Test); or (2) the average percentage of assets that are held during the tax year and produce, or are held to produce, passive income (Asset Test) is at least 50%. Passive income is defined as income that “is of a kind [that] would be foreign personal holding company income” (FPHCI) under the Subpart F rules.
A US Delaware C Corp treats PFICs as a standardized measure across all indirect owners. This is why we prefer US Delaware C Corp, because it means less time filling out paperwork for both our founders and us.
Darin Tuttle, Tuttle Ventures LLC
No Tax on Profits in Initial Years
The first reason is quite obvious – no taxation on profits for the first few years of business. When you set up your business in Delaware, you are a C Corp. As a C Corp, you are responsible for paying taxes on your profits. You don’t have to pay taxes on your profits in the first few years of your business. In fact, you can reinvest those profits in your company. There is no hurry for you to pay taxes.
Farhan Advani, BHPH