Entity incorporation is a key step in establishing a startup. Many founders choose to incorporate as a Delaware C corporation (also called a C-Corp).
The goal of incorporation is to protect intellectual property, minimize personal liability, and improve credibility for investors and customers.
In this guide, we’ll provide an overview of C-Corporations, with an emphasis on Delaware C-Corps, which are often the preferred legal entity structure for founders of technology startups.
What is a C-Corporation?
A C-Corporation is both a legal entity structure (under state law) and a tax status (under federal law) with the following attributes:
C-Corps have shareholders, directors, and officers. A shareholder is a person or entity that has invested in the company in exchange for ownership. The term director describes the individuals on the company’s board of directors. Corporate officers are the executives who carry out key business operations.
Liability is limited for investors and firm owners. In the event of a business failure, losses for an individual are capped to the amount of that individual’s investment.
C-Corps are mandated to hold annual meetings and have a board of directors.
The IRS requires C-Corporations to pay taxes on earnings before issuing disbursements (i.e., dividends) to shareholders. All individual shareholders are subject to personal income taxes on any distributions from the C-Corp as well.
C-Corps are governed by company bylaws.
C-Corps are required to file annual reports, disclosures, and financial statements.
C-corps pay corporate income tax using IRS Form 1120 and may be subject to state taxes in the state(s) in which they operate.
In the United States, C-Corporations are the most common type of business incorporation. All companies are taxed as C-Corporations unless they elect for a different type of business structure or filing status (LLC, S-Corp, B-Corp, etc.)
C-Corp vs. LLC
Another common entity type in the United States is a limited liability company (LLC). In general, LLCs provide pass-through taxation, while corporations are taxed as separate entities (VCs often require startups they invest in to be C-Corps because they don’t want tax exposure). Additionally, LLCs cannot issue shares of ownership. Instead, LLCs distribute equity to their owners via profit interests.
S-Corp vs. C-Corp
An S-Corporation refers to subchapter S of the IRS code and entails a different taxation scheme than a C-Corp. S-Corps can pass income and losses directly to shareholders without needing to pay federal income taxes at the corporate level, similar to the taxation status of LLCs.
S-Corporations must meet the following requirements:
Be a domestic corporation
Have only allowable shareholders
May be individuals, certain trusts, and estates and certain tax-exempt entities
May not be partnerships, corporations or non-resident alien shareholders
Have no more than 100 shareholders
Have only one class of stock
Not be an ineligible corporation (i.e., certain financial institutions, insurance companies, and domestic international sales corporations).
This table breaks down the key differences between a C-Corp, S-Corp, and LLC:
Why Create a C-Corp in Delaware?
Founders raising venture capital prefer Delaware C-Corps for a few reasons, including:
Delaware incorporation creates a straightforward path for issuing shares.
Delaware’s corporate tax system is well established, respected, and business-friendly.
Delaware corporations favor large public corporations with thousands of stockholders.
Delaware corporate statutes are flexible.
Shareholders, officers, and directors don’t need to live in Delaware.
Delaware corporations can locate their headquarters in any state.
Many venture capital investors expect to invest in Delaware C-Corps.
Taxes: Delaware C-Corps only pay corporate taxes to the State of Delaware if they are located within the state. There are three factors that influence the tax rate: property, wages, and sales everywhere. The corporate income tax rate is 8.7% of federal taxable income.
Ownership: Delaware C-Corps are shareholder owned with three levels of power: shareholders/stockholders, directors, and officers. The corporation can continue to exist after the original shareholders leave. Owners do not need to reside or conduct business in the State of Delaware.
Fundraising: To make raising venture capital easier, many startups incorporate as Delaware C-Corps.
Drawbacks of Delaware C-Corps
Delaware C-Corps are the most common company entity type in the United States. However, there are situations where a Delaware C-Corp may not be the right option your business. Here are some tradeoffs to consider:
Delaware C-Corps can be complex to manage and maintain due to their legal and tax requirements.
If you incorporate your business in Delaware, you’re required to have a Delaware registered agent. That individual needs to be able to accept legal filings on your entity’s behalf and be physically located within Delaware.
In addition to meeting requirements in Delaware, your Delaware C-Corp needs to be in compliance with the state in which it’s operating. That likely entails more work and more fees.
If your startup does not plan to grow through venture capital financing, a Delaware C-Corporation may be too much overhead to manage. It may also be too costly compared to other options for starting a business.
It’s a good idea to consult with a legal advisor before taking on the responsibility of creating a Delaware C-Corp.
How to Create a Delaware C-Corp
Before deciding to incorporate as a Delaware C-Corp, it’s important to be clear on your short, medium, and long-term goals for your business. How big do you expect the company to become? What is the potential exit strategy? Are you planning to raise venture capital? With these goals defined, you can work with your legal and tax team to get the process started.
Work with a legal and tax advisor to understand the requirements applicable to your business. Many founders find it helpful to know their tax and compliance responsibilities ahead of time, so that they can make plans and budget accordingly.
File articles of incorporation, along with a cover letter.
Obtain a certificate of good standing. This may be required to work with certain financial institutions.
Appoint the company’s initial board of directors.
Issue stock to shareholders.
Apply for an EIN from the IRS.
Form a Delaware C-Corp With AngelList
AngelList, now powered by our partners at Stripe Atlas, allows you to incorporate as a Delaware C-Corporation with a few clicks. Once incorporated, we automatically set up your cap table and update it as you purchase founder stock and issue SAFEs and employee equity.
Learn more about incorporation with AngelList here.