How to attract venture capital with a Delaware C-Corp

When you’re starting a business, one of the most important decisions you’ll make is where to incorporate your company. Eric Bahn, a successful entrepreneur and investor, learned this the hard way when he chose to set up his education startup as a California LLC rather than a Delaware C-Corp. Upon selling the business, his accountant revealed that he could have saved a significant amount on taxes had he chosen to incorporate in Delaware.

To help you avoid this costly mistake, here’s why incorporating your business in Delaware could be a smart move—especially if you’re planning to raise venture capital or seek equity investors.

1. Delaware is great for business

Delaware is renowned for its business-friendly laws, which are designed to help businesses thrive. The state’s corporate governance laws make it easier for companies to handle compliance, legal matters, and lawsuits compared to other states with stricter regulations. This is particularly advantageous when dealing with equity investment and navigating the complexities of a capitalization table.

By incorporating in Delaware, you’ll have fewer legal obstacles, giving you more time to focus on growing your business and attracting venture capital firms.

2. Significant tax savings

A major reason why so many entrepreneurs opt for Delaware C-Corps is the potential for substantial tax savings. Under the Qualified Small Business Stock (QSBS) exemption, if your company has been operating as a Delaware C-Corp for over five years before being acquired, you could be exempt from paying federal taxes on the sale.

This tax break could save founders and equity investors a significant amount of money. For Eric Bahn, incorporating in Delaware could have greatly reduced his tax bill after the sale of his business. Additionally, venture capital and angel networks are more inclined to invest in Delaware C-Corps due to these tax advantages, ensuring everyone benefits during a capital raising event or exit.

It’s important to consult a tax expert to understand all the specifics, but these savings make Delaware an appealing option for businesses looking to attract equity investors and venture-backed financing.

3. Investors and VCs prefer Delaware

Incorporating as a Delaware C-Corp is a no-brainer if you’re planning to raise money from VC firms or angel networks. Investors, especially in seed rounds, prefer Delaware C-Corps due to the state’s predictable legal framework and favorable tax treatment. For example, investors won’t be taxed on profits while the business is operating but only on their gains when the company is sold or goes public.

By setting up as a Delaware C-Corp, you make your business more attractive to venture capital and equity investors, helping you secure investment more easily. In fact, many venture capital firms actively seek out Delaware C-Corps, so incorporating there puts you in a prime position to raise funding. Learn more about why venture capitalists prefer Delaware C-Corps here.

4. Switching to a Delaware C-Corp is simple

If you’ve already incorporated your company in another state, don’t worry—switching to a Delaware C-Corp is relatively straightforward. There are legal services that can help you transition quickly and smoothly, so you can start enjoying the benefits of Delaware incorporation right away.

Conclusion

Incorporating your business in Delaware offers several benefits, from its business-friendly laws to potential tax savings and increased attractiveness to venture capital firms and equity investors. The state’s corporate structure is ideal for businesses planning to go through multiple rounds of capital raising or those preparing for a future seed round.

For entrepreneurs who want to maximize their opportunities and minimize their tax burdens, Delaware is a top choice. Take the time now to explore the advantages of Delaware incorporation—it could save you significant money and make your business more appealing to investors down the line.

For more insights on company financing and raising venture capital, check out Raise Millions from Hustle Fund here.