USA C Corporation Formation

Why Delaware

Delaware has a specialised business court, a large body of settled case law, and a corporate statute investors and their counsel know without having to research it.

That familiarity is the whole point. Incorporating elsewhere is not wrong, but it introduces a question in every financing that Delaware does not, and founders rarely benefit from being the exception.

What formation involves

• Certificate of incorporation filed with the Delaware Secretary of State
• Authorised share capital fixed, with room for an option pool
• Registered agent appointed in the state
• Bylaws adopted and the initial board appointed
• Founder stock issued, with vesting agreed
• Employer Identification Number obtained
• Section 83(b) election filed by founders within thirty days of stock issue

The 83(b) election has a hard deadline

Where founder stock is subject to vesting, an election under Section 83(b) must be filed with the Internal Revenue Service within thirty days of the stock being issued. It fixes the tax position at the low value at grant rather than at each vesting date.

The thirty days cannot be extended. Missing it can create a significant and entirely avoidable tax liability as the company appreciates, and it is among the most common expensive mistakes founders make.

Double taxation, and why founders accept it

A C corporation is taxed on its profits, and shareholders are taxed again on dividends. That is a genuine cost, and it is why an LLC suits a business that intends to distribute profits.

Venture-backed companies rarely distribute. They reinvest, and the return comes on exit through capital gains, which is why the double taxation that makes a C corporation unattractive for a lifestyle business matters little for a growth one.

How we handle it

1. 1 Structuring the cap table Authorised shares, founder allocations and the option pool are settled before filing, since changing them later costs more.
2. 2 Incorporation The certificate of incorporation is filed in Delaware and the registered agent appointed.
3. 3 Organisational steps Bylaws are adopted, the board appointed and founder stock issued under restricted stock agreements.
4. 4 The 83(b) election Founders file the election within thirty days of stock issue, which cannot be extended.
5. 5 EIN and banking The tax identification number is obtained and bank account opening supported.
6. 6 Indian reporting The overseas investment is reported to the Reserve Bank and flagged for Schedule FA disclosure.

Frequently asked questions