Most venture investors expect to invest in a Delaware C corporation. Here is why, and how to handle the annual franchise tax, which regularly surprises founders with a bill in the tens of thousands of dollars that they do not actually owe.
Why a C corporation
- It can issue preferred stock to investors and stock options to employees in a standard way.
- Many funds cannot or prefer not to invest in LLCs, which pass income and losses through to their owners.
- Only C corporation stock can qualify for QSBS. See our QSBS guide.
Why Delaware
Delaware's corporate law and its business courts are well developed and widely understood by investors and lawyers, and standard venture documents are written for Delaware companies. Your company can be incorporated in Delaware and operate anywhere, but it will usually need to register as a foreign corporation in the states where it does business.
The franchise tax
Delaware corporations pay an annual franchise tax, due March 1. There are two ways to calculate it, and the state's first notice often uses the more expensive one:1
| Method | Minimum tax | Maximum tax |
|---|---|---|
| Authorized shares | $175 | $200,000 |
| Assumed par value capital | $400 | $200,000 |
Startups often authorize millions of shares at a very low par value. Under the authorized shares method, that can produce a large bill. The assumed par value capital method, which uses the company's gross assets and issued shares, usually produces a much smaller one. Delaware lets you use whichever is lower. Corporations owing $5,000 or more make quarterly estimated payments.1
What diligence will check
- A certificate of good standing from Delaware, which requires franchise taxes and annual reports to be current.
- Foreign qualifications in the states where the company operates.
- That the shares issued match the shares authorized in the certificate of incorporation.
Entity choice has tax and legal consequences. Talk to a lawyer and tax advisor before you form or convert.