Delaware C corp for startups: why investors ask for it

Why do investors ask for a Delaware C corporation?

• Preferred stock. Venture investors buy preferred shares with rights that common shares do not have. Corporations are built for several classes of stock.
• Standard documents. The financing documents most venture lawyers use assume a Delaware corporation, which keeps legal costs and negotiation down.
• Familiar law. Delaware's corporate statute and the decisions of its Court of Chancery are known to investors and lawyers everywhere, so outcomes are easier to predict.
• Fund constraints. Many funds cannot easily hold interests in an LLC taxed as a partnership, because its income would pass through to the fund's own investors.
• Stock options. Incentive stock options for employees are available only from corporations.

What is the QSBS exclusion?

Qualified small business stock, or QSBS, is stock in a US C corporation that an individual acquires directly from the company. If the conditions are met, the shareholder can exclude gain on selling it from federal income tax. For stock issued after July 4, 2025, the exclusion is tiered:

The excluded gain is capped, per company, at the greater of $15 million or ten times what the shareholder paid for the stock. The corporation must have had gross assets of $75 million or less when the stock was issued and must run an active business in a qualifying field. Many service businesses, such as law, health, accounting, consulting and financial services, do not qualify. Stock issued on or before July 4, 2025 follows the earlier rules: a five-year holding period and a $10 million cap. LLC interests and S corporation shares cannot be QSBS.

How does Delaware franchise tax work for a startup?

Every Delaware corporation files an annual report, for $50, and pays franchise tax by March 1. There are two ways to calculate the tax, and the corporation pays the lower figure.

• Authorized shares method: $175 for up to 5,000 authorized shares, $250 for up to 10,000, and $85 for each further 10,000 shares. This is the default on the state's notice.
• Assumed par value capital method: based on issued shares and total gross assets, with a $400 minimum.

A startup with 10 million authorized shares is billed $85,165 under the default method. Recalculated under the assumed par value capital method, an early-stage company with few assets usually owes the $400 minimum. Always recalculate before paying. The maximum tax is $200,000 for most corporations.

Do you still register in your own state?

Yes. A Delaware corporation that operates from another state registers there as a foreign corporation and pays that state's fees and taxes too. A startup run from California, for example, also owes California's $800 minimum franchise tax. The process is the same as for LLCs. See registering in another state.

When is a Delaware C corporation the wrong choice?

• You will not raise venture capital and plan to take profits out each year. A C corporation's profit is taxed at 21%, then again when paid out as dividends.
• The business is a consultancy, agency or other service firm funded by its own revenue. An LLC is usually simpler and cheaper.
• You live outside the US and run a service business from abroad. See LLC or C corp for a foreign founder.

Can you start as an LLC and convert later?

Yes. Delaware lets an LLC convert into a corporation by filing a certificate of conversion, and investors often ask for that before they invest. Two costs of waiting: the conversion needs tax advice, and the QSBS holding period only starts when the corporation issues its stock. If you expect to raise venture money soon, starting as a corporation is cleaner. For the steps, see how to form a C corporation.

This guide is general information. It is not tax or legal advice for your situation.