Prospective business owners have a variety of options when it comes to choosing how their business will function and operate. Whether your business is a sole proprietorship, general partnership, or corporation, several factors can come into play, including taxation, investing, and even privacy.
One of these options is to incorporate your business as a C-Corporation in the state of Delaware. Is a Delaware C-Corp right for your business?
In this video, our partner Tucker Villarreal breaks it down:
“Many of our clients ask us whether they should form a Delaware C-Corporation or advise us that they have already formed a Delaware C-Corporation and ask what they should do next. So we thought it would be a good idea to discuss why this entity structure is likely not the best for you.”
Cons to the Delaware C-Corporation
To incorporate in Delaware, you first must have a presence there, which means you’ll need the following:
- To hire a registered agent in Delaware
- Have franchise access in Delaware
- File any filer requirements in Delaware
The likelihood is that your company will only be doing work in the jurisdiction you primarily do business in.
When we consider states like Texas, you must have a registered agent, pay Texas franchise taxes, and follow Texas filer requirements.
This means you’ll have to pay to work in two states when, in all likelihood, you will only work in one state at first.
Additionally, the C-Corporation form is not always the best fit for startups.
Just because some investors prefer C-Corporations and many large companies have a Delaware C-Corporation does not mean that this entity form is right for your situation.
The corporate form is more rigid and formal than other forms like the limited liability company or LLC. You may want to consider the benefits of being nimble at this early stage.
Lastly, there are tax consequences in forming a corporation that is not present in forming an LLC, as you may be missing out on many upfront deductions by making this choice.
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Pros of the Delaware C-Corporation
Delaware has a well-established Court of Chancery specializing in business law and is a strong, business-friendly body of law.
Delaware also has greater privacy requirements in disclosing the names of directors and officers. Lastly, large investors prefer the Delaware C-Corporation form for the above reasons.
However, unless you have a big-time investor who wants your company to be a Delaware C-Corporation, or you can, with certainty, say that your company will be working in multiple jurisdictions from the get-go, the Delaware C-Corporation is likely not the way you should go.
Remember that you can always convert your entity to a Delaware C-Corporation if and when it is appropriate and beneficial. There will be costs associated with this, but the conversion should pay off if you’re doing this to gain a large investor, for example.
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Bottom Line for Your Business
You should form your company in the state in which you will do most of your business and choose a form that best fits you. Which, if you are a start-up, is more than likely an LLC.
Whether you’re ready to start your own business or have an existing business, the team at Richards Rodriguez & Skeith LLP is ready to assist you in determining whether a C Corporation is the right fit for you. Contact us today!