5 Reasons Not to File in Delaware as a C-Corp

What is the definition of a C corporation?

A-C corporation (sometimes known as a ‘C Corp’) is a legal entity that serves to protect the owners’ assets from creditors. It can have a limitless number of shareholders as well as various stock classes. It’s a fantastic way to raise venture capital and other sorts of equity finance because of these qualities and other benefits. It pays taxes at the corporate level, unlike an S Corporation or an LLC. As a result, it is vulnerable to the double taxation disadvantage. Furthermore, unlike an LLC, a C corporation is subject to many more federal and state regulations.

A-C corporation has the advantage of being able to recruit investors more easily, as well as obtaining funds through equity financing. It is commonly thought that having shares is superior to possessing LLC membership interests. In addition, venture funders like to put their money into C businesses. Many venture capitalists, in reality, are unable to invest in S corporations or LLCs due to constraints in their governing papers and tax rules. Furthermore, organizations seeking an IPO prefer corporations to limited liability companies (LLCs) and are unable to pick S corporation tax status due to the 100-shareholder restriction. A corporation may also find it easier to secure bank financing. This is especially true for businesses that require a lot of funding.

A company has its rights, capacities, obligations, and liabilities after it has been constituted. A corporation can sue (or be sued) in its name. It has the authority to purchase, own, and utilize real and personal property, form contracts and guarantees, lend money, and invest funds.

Delaware Corporations

Delaware’s commercial and corporation laws are quite welcoming. With so many firms forming in Delaware, a substantial corpus of corporate law has developed, promoting predictable and likely outcomes when fighting and settling business law cases. If you’re starting a business, you’ve probably heard of forming a corporation in Delaware. More than half of all public firms are formed in Delaware, including many significant organizations such as Apple and Google.

The choice of which state to incorporate is one of the first decisions a new business must make. It’s no secret that forming a Delaware corporation (as a Delaware C corporation) is extremely popular, thanks to the wealth of information available regarding Delaware’s business-friendly tax and corporate legislation. While this is true in certain cases, it is not true in the great majority of cases. Businesses that do not expect to establish their primary office in Delaware, are located in another state, do not intend to genuinely obtain venture capital funding, or do not want to grow above a certain size limit have minimal need to incorporate in Delaware. Rather, most firms should form in the state where they are located.

Reasons Not to File in Delaware as a C-Corp

  1. Venture financing will not be able to help you start a business. Venture capitalists adore Delaware C corporations, but unless you’re in the extreme minority, you’re unlikely to ever acquire venture financing. Only about 0.06 per cent of startups will ever receive venture capital funding. Take into account the possibilities.
  2. Your company isn’t based in the state of Delaware. Instead, you have a ‘home’ office or business address in another state. If that’s the case, you’ll need to hire someone to serve as your Delaware registered agent, and you’ll still need to register your company as a foreign corporation in your home state. You’ll have to pay taxes on any income earned in your home state, and you’ll have to file annual reports in both Delaware and your home state.
  3. A franchise tax exists in Delaware. Franchise taxes do not exist in every state.
  4. By forming a business in Delaware, you agree to the jurisdiction of its courts. This implies that if someone wants to sue your company, even over a minor issue, they can do so in Delaware, and you’ll be stuck hiring Delaware-licensed lawyers and possibly travelling there to defend your company. This might be a considerable burden for enterprises based outside of Delaware.
  5. You cannot escape registering your business in your home state just because you own a fully web-based firm. Even if you don’t have a physical store and just do business online, you’re still a human being sitting in a chair someplace, staring at a computer screen to make money. If that chair is located in one of the 50 states, it is your home state, and you must register with that state, either by incorporating there from the beginning or by registering as a foreign corporation. The sole exception to this could be if a company is based outside of the United States.

Before forming a corporation in Delaware, consult with an attorney.

Only large corporations should consider incorporating in Delaware. In most cases, incorporating a small business in Delaware is not worth the time or effort. So, if you run a small business, Delaware is probably not the best place for you to incorporate. However, because every firm has different demands, there may be times when a small business may benefit from doing so. However, you should seek professional guidance from a company law attorney in your state before making a choice.

Conclusion

Smaller enterprises that are unlikely to receive venture capital funding but will conduct any type of business in their native state should normally incorporate in that state.

Some companies that provide online document filing services do not make this obvious to their consumers. Instead, they sell customers incorporation packages, leading them to believe that by filling out some online forms and becoming a Delaware C corporation, they’ve taken care of all of the necessary paperwork, only to discover later that they still need to register their company in their home state and comply with all of their home state’s laws. Be cautious about who you seek legal counsel from, as you would with any other aspect of launching a business, and be wary of offers that appear to be too nice to be real.