Features of the Delaware C Corporation 

Corporate governance

A corporation is managed by its officers in its day-to-day operations. These are the CEO, the CFO and the Secretary of the corporation (sometimes known as the President, Treasurer and Secretary). 

These officers are appointed by the board of directors who oversee their work and are responsible for making major strategic business decisions. 

The board of directors is generally elected by the shareholders who have no direct involvement in the decision-making — except on the most fundamental matters, like selling the corporation or making changes to its certificate of incorporation. 

The advantages of incorporation

Corporations offer several advantages that make them a popular choice for businesses of all sizes, especially those seeking growth:

Limited liability

Protects the personal assets of shareholders and managers from being used to satisfy the corporation's debts or legal obligations. 

This means that if the corporation is sued or goes bankrupt, your personal savings, home, and car are generally safe.

Centralized management

Corporations have a clear and well-defined management structure. 

The shareholders elect a board of directors who oversee the corporation's long-term strategy and appoint officers (like the CEO and CFO) to manage the day-to-day operations. This structure creates a clear separation of ownership and control, allowing for efficient decision-making.

Perpetual existence

A corporation has an indefinite lifespan. 

It continues to exist even if the founders die, leave the company, or sell their shares. This stability is attractive to investors and partners who know the business will endure beyond the involvement of any single person.

Unrestricted ownership

Unlike some business structures that limit the number of owners, corporations can have an unlimited number of shareholders. 

This makes it easier for corporations to raise capital by selling shares of stock to a large pool of investors.

Stock issuance

Corporations can issue different classes of stock with varying rights and privileges. 

This flexibility allows corporations to tailor their ownership structure to their specific needs. For example, they can issue common stock with voting rights to attract long-term investors and preferred stock with guaranteed dividends to attract short-term investors. 

Additionally, corporations can issue stock options as a form of employee compensation, incentivizing employees to become invested in the company's success.

Standardized governance

The governance structure of a corporation is fairly standardized across all US states. 

This predictability is beneficial for investors and business partners who are familiar with how corporations operate and who has the authority to make decisions on behalf of the company.

Tax benefits

C Corporations, specifically, can qualify for the Qualified Small Business Stock Exclusion. 

This tax benefit allows shareholders to exclude up to $10 million of gain from the sale of qualified small business stock from their federal taxes. This can be a significant tax advantage for founders, early investors, and employees who receive stock options.

Why pick Delaware?

If you want to raise capital from traditional VCs or seed funds in the US, you should incorporate your startup as a Delaware C Corporation. 

If you are advised to chose another business entity, ask the lawyer to write why. Then show those reasons to another lawyer.

Read on to see what makes the Delaware C Corp. the most suitable choice for high-growth startups — and how you can leverage these features to the fullest.

Structured for growth

Delaware C Corporations offer the flexibility to issue different classes of stock. 

This is instrumental when attracting investors. Common stock is the standard ownership unit, while preferred stock grants investors specific privileges, such as guaranteed dividends or priority in liquidation. This structure allows you to offer investors attractive options while retaining voting control through common stock. 

Note that typical fundraising from American VCs will require you to issue preferred stock to them. You, as founders, will own common stock.

Investor-friendly framework

Delaware's well-established body of corporate law is familiar to most investors. There is also a large body of past court decisions that helps lawyers to predict how the courts will interpret and apply Delaware corporate law in the future.

Delaware corporate law strikes a good balance between holding managers responsible for fraud and reckless actions but stops them from being persecuted for exercising their normal business judgement when things turn out badly.

This proven legal framework fosters trust and confidence in your company's governance and structure, potentially making fundraising smoother.

Specialized courts

The Delaware Court of Chancery is responsible for deciding corporate law related disputes in Delaware. 

The judges on this court are nationally (and internationally) renowned experts on corporate law. Contrast  this with some other states where complex corporate law disputes may be decided by juries of untrained, randomly selected citizens.

The proceedings of the Court of Chancery are private which is also a big advantage.

Streamlined bureaucracy for corporate matters

In my experience, dealing with the Delaware government workers and officials responsible for incorporating and administering existing corporations  has been easy and quick. The paperwork is not unduly burdensome and response times are short.

Privacy protection

Delaware prioritizes the privacy of shareholders, directors, and officers.

Their names and addresses are shielded from public disclosure, offering an extra layer of confidentiality for your founding team and your investors — especially those who take seats on the board of directors.

Flexibility

Delaware's corporate-friendly laws provide significant flexibility in establishing and managing your corporation. 

You can tailor the structure to your specific needs as your business grows. Remember, this is a feature that should be used sparingly. Making your corporate governance arrangements non-standard can make it difficult to raise capital and increase legal complexity, risks and costs.

What is the 'C' in C Corporation?

We have discussed the features of corporations in general, and Delaware corporations in particular. What is the significance of a 'C' Corporation?

Under corporate law, no such concept exists. It is, instead, a classification under tax law. A 'C' Corporation is just a corporation that is taxed in its own income. When it pays out dividends, the shareholders are  taxed again. This is called double taxation. 

This is in distinction to an 'S' Corp. An 'S' Corp is not considered a separate entity for the purposes of tax law and its shareholders are directly taxed on their proportion of the corporation's income. This status has to be specifically opted into by filing the necessary paperwork.

Please note that an S Corporation can only have a maximum of 100 shareholders and all the shareholders must be US tax residents. 

Conclusion

The Delaware C Corporation stands as a beacon for high-growth startups — offering a robust structure, clear governance, and significant tax benefits. 

Its adaptability to various business needs and its appeal to a wide range of investors make it a compelling choice. As you embark on your entrepreneurial journey, consider these advantages and how they can fuel your startup’s growth and success.