The Definitive Guide for
So you are working on your new startup and you have your business plan , the money you are going to invest in your business and even figured out operations and marketing.
But some question remain.
What sort of business entity to form (LLC / C-corp/ S-corp) and
Many startups and VC funds
In this article I will let you know:
- What are the benefits of forming a company in Delaware?
- What are the disadvantages of forming a company in Delaware?
- Should you form an LLC or a C Corp or an S Corp?
- How can you form a company? What are the costs involved
Note: This is not a legal advice and I am not a lawyer, please consult your lawyer before taking any decisions.
Benefits of forming a company in Delaware
Delaware has a
- Corporate Law
- Startup costs
- Tax purposes
- Few formalities
- Easier to raise investments
Delaware has a special court of Chancery for law disputes and strong protections for companies that are incorporated in Delaware.
The outcome of cases in Delaware is more predictable because of the
- A large volume of cases are recorded in Delaware hence there is a large base of precedents that can be looked into and hence there is less uncertainty if there is a case filed against your firm.
- Delaware special court of chancery has judges with corporate law backgrounds, hence cases are decided quickly and with justly as compared with courts where judgment is in the hands of ill experienced juries.
- As more than 60% of fortune 500 companies and a large number of private and public enterprises are incorporated in Delaware, more corporate attorneys are familiar with the Delaware laws and it’s more convenient to hire a lawyer.
You don’t have to name your shareholder’s officers and directors publicly. Only in the case of law enforcement you need to release these names. Hence it
There are minimal startup costs in Delaware. In Delaware
If you are forming a C corp. even a single person can perform multiple roles of the shareholder, officer, and director. In other states, you need
Following are the tax benefits of incorporating the company in Delaware:
- There are no corporate taxes in Delaware if you do business in another state.
- There are no royalty payments or taxes on intangible assets such as patents.
- There are no taxes for non-resident individuals or entities (that is if you don’t reside in the forming a don’t do the business in Delaware you don’t need to pay income taxes, sales tax or any other kind of tax)
Many investors and Venture capitalists prefer Delaware because of they are familiar with the business laws hence it is easier to get an investment in your firm if you are registered in
Disadvantages of forming a company in Delaware:
Drawbacks start when you are incorporating in Delaware and aren’t actually doing any business in Delaware. If you do that you will need to re-register the company as a foreign entity in the state in which you are
Hence now you will have to do 2 filing instead of one and you also need to hire an agent and pay annual fees to
an LLC s and a C – Corp
In Delaware and in fact anywhere in the United States, the most used types of corporations are LLCs and C-Corps.
What is an LLC?
An LLC is a type of company which is organized in an
An LLC is organized as a contract between members(owners) stating how it will be run and how the income and liability will be split between the memebers.
A few common characteristics of LLC:
They are designed to provide a corporate veil and a limited liability to the founders. That is moving
LLC provides pass-through taxation that is generally the owners pay personal income taxes on the income earned by the business.
Formalities that are required by corporations such as board meetings, corporate resolutions directors issuing stock and drafting bylaws are eliminated. The LLC is governed by the contract between its partners, the contract itself is not required to be disclosed to the public hence it is easy to maintain and operate.
LLC can also be easily converted into a c corp. Converting a Delaware LLC to a Delaware corporation is straightforward and common enough that only a few forms are required to be filled to complete the process.
How to form a Delaware LLC:
Forming a Delaware llc is quite easy you just require 2 things:
- Filing a certificate of formation
- Documenting your operating agreement
Before filling for the certificate of formation you must decide on a name for your firm and check for conflict with the Delaware Secretary of State. It can easily be done
Delaware does not require you to publicly release your name while filing for the certificate of formation, but you can include it if you wish to.
A certificate of formation must include:
- The name of the LLC
- The name and address of the registered agent
- The signature if the authorized individual
Delaware registered agent requirement:
You can form a Delaware LLC without visiting opening an office or maintaining a bank account in Delaware. However, the Delaware state act requires you to have an agent if you do not have an office in Delaware. You can hire one of the many agents available online just search for a Delaware registered agent, they charge anywhere between $120 to $300 per year and forward any document and legal stuff that the state sends you
Delaware C corp:
A corp is a full-blown corporation, they have
C corps are designed to be an abstraction between the operators of a business and owners of a business
Owners are called as shareholders and ownership is tracked by shares i.e more percentage of shares a person has. a more economic entitlement as well as the
Characteristics of C-corp
Corporations are intended to provide limited liability to the shareholders. Shareholders are not liable for the debts and
As a corporation
Feasibility and suitability
LLCs are well suited for these companies because Intellectual property can easily go from members (owners) to LLC and vice versa plus there is minimal paperwork and hassle.
On the other hand C corporation requires a lot of ceremony for example s shareholder resolutions and meeting before
While the United States or Delaware does not impose any restrictions on citizenship or permanent residents for owning an LLC or a corporation. Owning a LLC for non residents
complicate the matters
For example, if a non-resident is an owner of an of an LLC in the United States. They will have to pay taxes in
Many venture capital firms and investor prefer c corps because the flexibility accorded with LLC require’s them to do extensive legal due diligence before investing and many do not prefer expensive legal work as a requirement to of in a company.
C corp is a corporation with standard laws and terms. So many investors prefer and require companies to be converted
Tax loopholes while forming a Corp as a startup
Thers is a lot of flxibility for planning your taxes in the c copr. A LLC will have to wait a few years to take advantage of tax benefits but an C copr can enjoy its benefits in the first year itselfd
These benefits are called as fringe benefits. What fringe benefits mensa that a company can give its employees benefits and deduct them as expenses for tax purposes.
The only condition is that the benefits must be for an array of employees
C corp can deduct all business expenses such as
C-corp also face lower taxes on retained earnings this is unique to C corps of the owners can use the tax savings to further expand their company