Kathryn McCall explains why so many companies incorporate in Delaware: it has its own corporate court, decades of legal precedent, and liability protections that venture capitalists want. She covers S-corp elections, LLC structures, and how to convert between entity types.
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You can do what we call an S corp election, which means your corporation will be taxed like a partnership. But there are certain limitations on that. Then the whole issue of Delaware. Why do we form corporations in Delaware? What's the deal with Delaware? Delaware set itself up— oh gosh. about 120-odd years ago now, to be very friendly to corporations. They have a whole separate court system for corporations in Delaware. There's— for lawyers, when we're trying to advise our clients, we're always looking at decisions that were made before. We have maybe a rule or a law, but how is that interpreted? How does that How does law get interpreted in real life? Well, we look at past decisions, past court cases. How did this get interpreted before? Do we have similar facts to some other court case we can look at? So if my client is saying, is this valid notice for a shareholder meeting, I can look and say, hey, this— they did it this way, this— yeah, that should be okay. So Delaware has a huge— because they have this separate court system, a huge body of law that we can look at. So it means that there's a lot of certainty in dealing with Delaware law and Delaware corporations. Delaware has the most limitation of liability for corporate officers and directors, which again makes it really popular with VCs. There's no wildcard So I talked again in like— Delaware has a whole separate court system to hear corporate cases. And it's heard by a judge who's knowledgeable about corporate law. Corporate cases are really complex. Shareholder derivative actions, things dealing with corporate formalities, really complex. So you're going to have a judge knowledgeable about the corporation law. And the judge is appointed by the governor. The joke is kind of amongst Delaware attorneys who actually go in and litigate these types of cases that they generally know the outcome before they go in because it's so certain and so much precedent has gone before. So again, this is the precedence, less litigation. And when you have certainty, you have more power. You can be more certain about the outcome for your corporation, and certainty in business is a very good thing. There are so many things that are uncertain. Are people going to adopt your technology? Are you going to be able to build it? Are you going to be able to fund it? Are you going to be able to do all of these things? This is something that can be certain and you can rely on, like one little peg in the shifting universe. So, the basics when you're figuring out how do I want to get this business off the ground, what kind of entity should I be? Oh, shoot. I'm already a partnership or a sole proprietorship. How'd that happen? What do I need to do? Think about your size of the company and your future plans. Think about what sort of protection of personal assets you might need. What's the tax treatment? How are taxes going to be handled? And what kind of flexibility do you need? And then lastly, and we touched on this in the beginning, it's not a lifetime commitment. You can change your structure later. I've taken corporations to LLCs, LLCs to corporations. I've taken a group of founders who've come in. They don't even know they're a partnership, but we form their corporation backwards and forwards. I have taken Texas LLCs and made them Delaware corporations. I've taken Nevada corporations, made them Delaware corporations. California— I mean, it's It's all doable. It just— again, it's time. Quite frankly, it's time and money. It's paperwork. It's time and money. And just figuring out how you're going to do that and how you're going to transition those over. But again, one of the things I love about working with businesses and corporations is I can fix just about anything. Litigation, sometimes you get stuck and you can't fix things. I can fix just about anything. I can take your entity and morph it into what it should be. All right. Any questions? Nope. Clear as mud? Yes. I have a question.
