In this interview, Jason Furtado walks through the practical reasons why investors and venture capitalists overwhelmingly prefer Delaware C corporations over other entity types. He explains the legal comfort provided by Delaware’s well‑established corporate law, contrasts the tax and governance structures of LLCs versus C corps, and details the various taxes a Delaware‑incorporated company faces, including franchise tax and foreign registration fees when operating in other states. Furtado then outlines the pathways for converting an existing LLC (e.g., an Arizona LLC) into a Delaware C corporation, emphasizing the importance of assigning intellectual property to the new entity and using vesting schedules to protect founder equity. He also touches on naming and trademark considerations when selecting a Delaware corporate name and notes how the standardization of Delaware corporate actions enables software platforms like Shoebox to automate compliance steps. Throughout, he answers specific audience questions about benefits, tax obligations, and conversion mechanics.
Questions this video answers
Investors are comfortable with Delaware because its corporate law is well‑vetted, stable, and familiar; most public companies are Delaware corporations, and many venture funds require investments to be in Delaware C corps.
Delaware C corps pay a franchise tax based on authorized shares or assets, but they also owe taxes in the state where they operate (e.g., registration and annual fees in California) and must comply with that state's tax obligations.
Options include converting the existing LLC with attorney assistance if IP exists, or abandoning the LLC and forming a new Delaware C corp, then assigning all founders' IP to the new entity with appropriate equity and vesting arrangements.
Chapters
So most— there will be checklists, there are links to blog posts. Any platform that's trying to help you through this will have a lot of help content. So you can educate yourself as you're kind of getting your company started. You'll need an address of some sort. I'm from Boston, by the way. Sorry. And then there's some tooling here. So, in this case, your name, if you're selecting a name in Delaware, your name needs to be unique. Beyond that, they'll let you incorporate, but you still want to make sure that, for example, you make sure, hey, is the .com available? How do you think about trademarks? Like, there's a bunch of stuff that you need to think about beyond just, can I incorporate this name legally in Delaware? Question.
What are the benefits of incorporating in Delaware?
So, any investor that you will work with will likely force you to incorporate in Delaware. And really, the reason why that is, is they understand it. The body of law in Delaware has been vetted quite a bit. Any public company, they're also Delaware corporations at the end of the day. So, it's really a matter of comfort. How the laws have been structured and they haven't really changed, are kind of set up to make folks comfortable investing dollars. So institutional investors that end up putting money into the venture funds for their own tax purposes and how they do their regulatory requirements, they understand Delaware really well and they'll— some of these organizations will force any investment to only be in companies that are Delaware C's. What's the other word, C? C corporation. So there are a couple different kinds of entities you can create. There's an LLC, also known as like a pass-through entity. In that context, if you say you get some revenue into the company, the proceeds of the revenue end up passing through to the underlying holders of that organization. In a C corporation, that doesn't happen. The company in and of itself gets the revenue and they can reinvest it into building their— building the company itself, but the individual founders, let's say the employees, they're not necessarily going to get— if you close a deal for $1 million, the individual founders don't get the proceeds right out. And obviously if you're an investor and you expected this to be a real company, you don't want the founders taking direct dollars out of the revenue. They get paid a salary like any other employee. anyone else, and you have equity to motivate you to build this big company and create profits, so this organization becomes worth a lot of money down the road. So it's a little bit of a different motivation. Some folks, when they first create their organization, they'll start as an LLC because they want to get the dollars that come through to pass through to them. As soon as you take any meaningful capital, that probably won't be acceptable to your investors. They'll want you to transition to a corporation. That also defines how you'll operate. An LLC is a much more open-ended entity. How you get things approved, how you structure things, how decisions are made, it's much more ad hoc. In a Delaware C corp, you have a board. The board has a right to approve a bunch of the different actions you take. There are stockholders. Those stockholders have rights. and they need to approve certain actions that you might take. All of those are spelled out in Delaware law, so it's a much more rigid entity. One of the reasons why Shoebox can do what it does, helping a company automate corporate action, is because of that standardization. Because there's a strict definition of how most actions need to take place, software can actually encode that and make it easy for you to follow those directions. Does that make sense?
Cool.
Yeah? Would the company that's incorporated in Delaware, they pay taxes in Delaware? So that's a good question. There's different kinds of taxes. So there's a franchise tax. So you'll have to— in the company that you incorporate, in the state you incorporate in, so as a Delaware C corp, You'll pay a franchise tax. The franchise tax is generally based on the number of shares you authorize, or it's based on how much— the amount of assets you have. So, there's different calculations for that. In general, you're not going to pay more than, like, for your first couple years, like $1,000 would be a lot of franchise tax. There are other issues, though. Say that again. In the early stages, right? You're going to pay tax to the state in which you're operating. You're also, if you're, say you're a California entity, so you're actually in California, you're a Delaware C corp, but you're domiciled in California. You have an office down the street over here. You'll also have to register as a foreign entity in California. So, you'll also pay a registration fee and also pay an annual fee to the state of California as well. That helps the state know, hey, you have employees. I should expect certain taxes from the employees that you're hiring in our state. I'm going to keep track of that and look at, hey, where's that W-2 for that employee that came through? It's a way of the company keeping— it's a way of the states keeping track of what you're up to and expecting tax revenue. And also a way for you to avoid getting in trouble down the road, because they will come back to you if you actually get off the ground. A lot of this stuff is kind of loosely applied by the states until you actually get off the ground, and then if you haven't done the right things, then you'll pay penalty taxes like crazy, because they'll take care of you later if you don't do the right thing up front.
So me and my co-founders, we just filed for an LLC in Arizona. So how would we go about— it hasn't even been approved or whatever yet. But how can we go about switching that to a C corp in Delaware?
So there's a couple options that people do when they transition. Some folks, if they've created meaningful IP and they really feel like they need to convert the entity, That's usually pretty easy. An attorney can help you do that. Some folks, if they haven't done anything yet, there's no meaningful IP, they haven't really gotten off the ground, you can basically abandon the LLC. Just assume it didn't exist. Create a new entity. And everyone assigns all their IP to the new entity. Because if you haven't— if you create an entity and no one has assigned any of their IP to that entity, the entity is kind of just a shell. It doesn't do anything. And then as you get the new company off the ground, you'll want to get each of the founders, the folks that are involved, to assign their IP to the entity. Because otherwise— the other thing that happens is you have a couple folks, you're just getting off the ground, it's kind of informal. And this is kind of— this is the Facebook example, right? You had a few folks, one of them never signed any agreements. They didn't really do that much anyway, but— they were in the discussions, 10 years down the road you have a company that's worth a damn, all of a sudden they come out of the woodwork and say, hey, I never assigned my IP, I was involved in this organization. And if they can prove that, they'll take their pound of flesh. So, you want everyone that you're working with to at least assign their IP to the company. In exchange for that, they likely get some equity. But there should be vesting attached to that, so that if they're not around for very long, they don't walk away with very much. And based on how committed folks are, that should reflect in the amount of equity you give them.
