Today we’re answering the question: Why do VC’s prefer to invest in Delaware C-Corporations instead of LLC’s or S-Corps.
And the first reason is LLC’s and S-Corps are pass-through entities. Meaning the profits and losses of those entities are captured on the individual owner’s tax returns. Now for VC funds that have big institutional investors, that’s actually a problem. It creates a bunch of issues tax-wise for the funds and their investors. So, VC’s just say no and insist on investing in Delaware C-Corp structures.
The second reason is the case law in litigation in Delaware is very well known and understood. It’s a business-friendly state. Everyone knows the rules. You know how to play by those rules. You know if you’re at risk of being sued. And so, VC’s also like the legal structure and the legal rules in Delaware.
Those are the two reasons why VC’s always prefer to invest in Delaware C-Corporations.