Delaware C-Corporations are preferred to other organizational structures when selecting investments because they present several advantages over LLCs, S-Corporations, and different states corporate legislature.
- How helpful? Scale of 1 to 5
C-corporation, Delaware, S-corporation, LLCs, Advantages of C-corporations
- Relevant questions addressed
What are the differences between LLCs, S-Corps and C-Corps?
Why do VCs prefer C-Corporations?
What are the advantages of incorporating in Delaware?
- Summary bullet points
- Investors prefer corporations over LLCs mainly because it’s harder to transfer ownership of LLCs and because they are more consistent in terms of management’s responsibilities.
- Investors prefer C-Corps over S-Corps because
- the latter present restrictions on the number of shareholders, as well as on their legal status in the US (citizenship/residence)
- But mainly because an S-Corp’s shareholder must be a natural person and because they cannot offer preferred stock
- Investors prefer Delaware C-Corps because
- Delaware law allows for multiple classes of stock
- They can reward employees with stock options, which incentivize early employees to work towards growth
- They can deduct employee benefit as business expenses for tax purposes
- They pay low income taxes on retained earnings
- When internal legal issues ensue, they are handled by the Delaware Court of Chancery, well known for its corporate law expertise
- Follow-up links
What is the Delaware Court of Chancery? - https://www.delawareinc.com/blog/what-is-the-delaware-court-of-chancery/
Limited Liability Company - https://www.irs.gov/businesses/small-businesses-self-employed/limited-liability-company-llc
S Corporations - https://www.irs.gov/businesses/small-businesses-self-employed/s-corporations
C Corporation - https://www.investopedia.com/terms/c/c-corporation.asp