If you are a startup and you are going to get venture capital financing, you should consider incorporating out-of-state and become a Delaware C-corp. This means your initial incorporation happens in Delaware. There are a few reasons why you would want to do this and this article will discuss a few.Insert video:
Reasons Venture Capitalists Want Delaware C-Corps:
- A C-Corp structure is not a pass-through entity like LLCs or S-Corps where the profits or losses get passed through to investors, C-Corps retain the profits and losses at the C-Corp level.
- C-Corps are friendly with the venture capitalists’ tax structure.
- Delaware corporate law, it is very well known. There is a ton of litigation and VCs tend to understand what the rules are in Delaware
You have some other options to incorporate. You can always incorporate in the state that you’re from and occasionally we will see a California C-Corp or a New York C-Corp.
However, we don’t recommend that just incorporate in Delaware.
Again, everyone understands the rules of Delaware. Your investors are going to tell you to switch as soon as they put money in the company.
After becoming a Delaware C-Corp, make sure to:
File Where You Have a Team - You are going to need to file or incorporate in the states that you are operating or have a team in. So if you are a Delaware C-Corp, but have a team in California. California will require you to file and say that you are conducting business in California. This is called a foreign corporation filing.
Pay Fees - Wherever you file, you will most likely have to pay a fee. Anywhere you are operating, meaning anywhere you have employees, assets like computers, servers, buildings, equipment, or you have properties like land, you have probably triggered tax nexus and you need to file in those states. So, if you file in California, there is an $800 franchise tax, New York, I think their annual tax is around $350. Most states will have this, and some of the less expensive states’ fees may only be $50 or $100.
File Payroll Tax in the States Where You Have Teams - The other thing to remember is if you are going to have employees in other states, you will have to also file for a payroll tax ID and start paying payroll taxes through your payroll provider for the employees in those different states. So, if you are like and have employees that moved out of California or out of New York and moved to Wyoming, you have to go into your payroll system, input the new payroll ID account for the Wyoming account and the Wyoming tax rate, and start running their payroll as if they’re in Wyoming. The thing that typically creates an imperative to register or incorporate in another state is that you had an employee move.
So, I hope this helps, I know it can be slightly confusing but remember, you’re almost always going to be a Delaware C-Corp if you’re going to go after venture capital funding.
You will also have to register in all the other states that you have employees or property in, and you’ll also want to register for payroll taxes in those states where you have employees. And where you incorporate does NOT impact where you have state tax nexus for sales tax, nor does it influence which tax credits you can apply for. For example, a biotech company can be incorporated in DE, but can have research centers in New York and claim the New York Life Sciences Research and Development Tax Credit.
It is simple, but there is a lot of legwork. Our experts here at Kruze are happy to do it for you. Also at Kruze, another option is working with a PEO; that is how you “Incorporate in a state.” Hope that helps, thanks.