Why Venture Capitalists Prefer Delaware C-Corps

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.

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5.

  • Topic Tags

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
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