Jared Brubaker explains why startups should incorporate as C corps instead of S corps or LLCs. Venture capitalists prefer C corps, and most Silicon Valley startups incorporate in Delaware because of its corporate law advantages for founders and investors.
Chapters
One of the questions that I get from people from the— that grew up in the U.S. is whether they should be a C corp, an S corp, or an LLC. A C corp is a classification of corporation under the U.S. tax code. And there are some benefits and some disadvantages to that. There's also an S corp, which is basically not— it's definitely not used for startups. There are also LLCs, which are better for tax purposes. All else being equal, there's less tax. However, institutional investors like venture capitalists can't invest in them because of their own tax issues. So because of this, basically all Silicon Valley startups are C corps. If— and again, there's an exception here where if you're sure that you aren't going to be taking money from venture capital firms, instead you'll be taking it from partners in the industry or stuff like that, an LLC could work. It can get messy if you switch down the road from an LLC to a C-Corp. So in any case, virtually all Silicon Valley startups are C-Corps. So— and the vast majority of Silicon Valley startups are incorporated in Delaware. There are reasons. The best reason is that everybody else is incorporating in Delaware. And that is like— that is because if you want to do something with your company, like if you want to issue stock or if you want to issue notes or do some reorganization, if you're a Delaware corporation and you come talk to me, I will— will know immediately exactly what to do. I'll know exactly what the relevant Delaware law is and what the general practices are. If you're a corporation that's from like Wyoming, I'm going to have no idea. I'm going to have to look at the code, maybe talk to some other people, you know, take forms that were meant for Delaware and try to convert them into— into Wyoming. So, it's— so, because corporate lawyers in Silicon Valley are much more familiar with Delaware law, it will be cheaper and easier in the long term. Another is that Delaware law respects agreements. So, other states like California, for example, will— when they get court— when courts in California get cases that have to do with with corporate law, there's often a temptation to look at like what's fair, you know, like, well, you know, so yes, there was this agreement that they signed, but this doesn't seem quite fair. This wasn't, you know, this may not have been what we think that the parties intended, and so we're not gonna follow what the agreement says. And that's bad. from a legal certainty point of view because you don't know what's going to happen. With Delaware, on the other hand, they're very— they always— they follow— they basically follow the agreements. They're also— they're professionals. They're a lot easier to work with.
