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Is C-Corp registered in Delaware the only option, if you are seeking to be funded?

Of all available options to incorporate, I hear it again and again that if you are to seek funding - angels of VC - you have to be incorporated in Delaware and be a C-Corp entity.

The argument is that 1) C-Corp set up is the most favorable for investors and 2) this is the way it has been done for a very long time and investors are simply the most comfortable with this approach.

This means that if you register in any other way, you will have to restructure. If you have registered outside Delaware, you will most likely have to move your company registration, or no funding.

Ideally, I would like to incorporate as LLC, because the paperwork is not that strict and demanding, also tax benefits. Once an investor is interested, move to C-Corp. But do I need to register the LLC in Delaware to ensure easy conversion?

On top of this states started to look into 'where you perform business activities'. I am in California, which means no matter where I register, I will be under California's law and taxation rules; no real benefit to be registered in Delaware with the only exception to satisfy potential investors rules.

What is your experience and how did you approach this?

22 Replies

Arnaud Barray
0
6
Arnaud Barray Entrepreneur
Authentic Businessman
Thanks Arnaud R. Barray +41 78 724 25 24 Skype: arnaud.barray Le 20 sept. 2016 ? 20:08, Nickolay Kolev a ?crit : FD:Discuss New Discussion on Is C-Corp registered in Delaware the only option, if you are seeking to be funded? [Nickolay Kolev] Started by Nickolay Kolev Entrepreneur | Founder/CEO | Technical Adviser | Software Development Leader and Manager Of all available options to incorporate, I hear it again and again that if you are to seek funding - angels of VC - you have to be incorporated in Delaware and be a C-Corp entity. The argument is that 1) C-Corp set up is the most favorable for investors and 2) this is the way it has been done for a very long time and investors are simply the most comfortable with this approach. This means that if you register in any other way, you will have to restructure. If you have registered outside Delaware, you will most likely have to move your company registration, or no funding. Ideally, I would like to incorporate as LLC, because the paperwork is not that strict and demanding, also tax benefits. Once an investor is interested, move to C-Corp. But do I need to register the LLC in Delaware to ensure easy conversion?
Sam Thacker
2
0
Sam Thacker Entrepreneur
512-990-8756 Growth capital for SMB & mid-market companies
I have been guiding entrepreneurs through VC, private equity and subordinated debt since 1994.

It is absolutely not necessary to incorporate in Delaware if you are going to chase VC or PE. I can't speak for angel investors because I don't deal with them.

It is probably true that 20 years ago it made a difference to be a DE corp. Today, you still have to register as a foreign corporation in any state you want to do business (have an office). You can't escape paying a state's income taxes or franchise taxes, and not registering in other states carries fines and penalties.

Regarding the "C" corp question, if you are chasing VC or PE, they do want you to be a C corp most of the time. There are exceptions when LLCs will work fine and LLPs work too.

The biggest reason for the C-corp requirement is to make it easier for the VC or PE to have a preferred class of stock. Most VCs and PE firms don't want the pass through liabilities associated with the LLCs and S-corps. There is also a limit to the number of shareholders in LLCs and S-corps.

There are a number of good VCs and PE firms that want you to be a C corp for exactly the reason you don't want to be one. They want you to spend the time and effort for strong corporate governance. They require you have quarterly board meetings, and they want to make sure you operate your company so it doesn't have any potential contingent liabilities that can arisefrom the looser legal requirements of a LLC or S-corp.

Hope that helps. Feel free to call me with specifics because there are numerous cases when an LLC will work just fine.

Sam Thacker
Business Finance Solutions
[removed to protect privacy]
Nickolay Kolev
0
0
Nickolay Kolev Advisor
Freelancer at Private
@Sam, this is great answer! I was wondering about Delaware, because I wasn't sure what would the benefits be to register there, if nowadays states look into intentions and potentially the corporation will end up paying everything a Cali corp pays.

I thought LLC protects you from liabilities. You make me worry that LLC will not provide the shield I was expecting, electing that. Do you mean C-Corp offers more and better shield? Or that LLC doesn't offer protection? Sorry, a bit confusing for my dummy level on the topic :).
James J. Cronin III
0
0
James J. Cronin III Entrepreneur
Compliance Analyst, Malartu
Not legal advice, but I would suggest you explore crowdfunding. Investment/equity crowdfunding is another option. malartufunds.us has good info.

I agree with Irwin below, you can change if a VC really wants you to and the deal is that lucrative. Otherwise, do what is best for you and your company.
Irwin Stein
3
0
Irwin Stein Advisor
Very experienced (40 years) corporate,securities and real estate attorney.
Not every question posed on FD has a correct answer, but this one does. Where you incorporate and what form you chose has both tax and legal implications. The correct answer for you may not be the same for everyone else. No angel or VC worth its salt cares about where you are incorporated and if they did it can fixed at the time they fund you.
Martin Omansky
2
0
Martin Omansky Entrepreneur
Independent Venture Capital & Private Equity Professional
Delaware is chosen because its laws and courts are friendly to management, but California is not too shabby. Going to "C" from LLC is often a nightmare. More investors are choosing LLC's model anyway, especially angels that want "current income". Consult your securities and tax law specialists for guidance. Sent from my iPhone
Ema Chuku
0
1
Ema Chuku Entrepreneur
Designer. Product Developer. Founder @ NuPad
This is not a legal advice nor am I capable of answering this question but from what I have seen, I know startups who got venture capital while under LLC. And some who prefer S-Corp rather than C-Corp. LLC is idely preferred as a start (for paperwork and time reasons). Delaware is chosen by most due to low barrier entry.

That said, in an era of startup, there's probably no such thing as "This is how it's been done for many years, so we shall do it this way..." terminology. Startups exist to disrupt.

It's less a difficult process to switch from LLC to Corp, than vice versa.

LLC protects you from liabilities similar to Corps.. Corps mostly favor big large companies. You can always consider S-Corp instead.



Don Ross
2
0
Don Ross Entrepreneur
Managing Partner Digital Health at Life Science Angels
Why Delaware? Delaware has well understood laws and a separate court system for commercial disputes. Even in California (Silicon Valley), Delaware is preferred.

That said, companies incorporate in other states do get funded.

Don Ross
2
0
Don Ross Entrepreneur
Managing Partner Digital Health at Life Science Angels
Also, for entrepreneurs and Angel investors, the company must be a C-corporation to take advantage of the 1202 tax exclusion (potentially exclude up to $10 million in gain upon an exit). See article:
David Austin
0
1
David Austin Entrepreneur
Entrepreneur
Some recommend starting as LLC, then when VCs come create a separate C-Corp entity as a member of the LLC. This allows you to keep the structure of the LLC for tax reasons, and provide investors with the investment vehicle they prefer. As always, make sure an attorney is on board and everythings legit.
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