All Startups Should Be C Corps, But Not Necessarily In Delaware

March 24, 2025  |  By Kevin Vela

For years we had a popular blog that described why startups should be incorporated in Delaware. While the entity structure remains the same, Delaware is no longer the clear choice.

Let’s start with entity type and compare it vs. an LLC.

Most startups, especially those planning to raise venture capital, should be structured as C corporations (C corps) rather than LLCs (Limited Liability Companies) for several key reasons:

1. Venture Capital and Investor Preference

• VCs typically do not invest in LLCs because they prefer the clear, standardized structure of a C corp.
• Many venture funds have tax-exempt or foreign investors who cannot invest in LLCs due to the complexity of pass-through taxation.

2. Stock Issuance & Equity Incentives

• C corps can issue stock options (like ISOs and NSOs) under a formalized stock option plan—a key tool for attracting and retaining employees.
• LLCs can issue membership interests, but this structure is less flexible and comes with tax complications for employees.

3. Tax Considerations

• LLCs are pass-through entities, meaning profits and losses pass directly to members, creating tax burdens even without cash distributions.
• C corps, while subject to double taxation (corporate level + shareholder dividends), provides tax predictability and better reinvestment of profits into the business.
• Qualified Small Business Stock (QSBS) Exemption (Section 1202) allows investors in C corps to avoid capital gains taxes on the first $10M in gains if held for 5+ years. This one is key.

4. Scalability & Public Offering Potential

• Most startups aim for an IPO or acquisition, and public companies must be C corps.
• A C corp’s clear corporate governance (board, officers, shareholder rights) makes it easier to scale and attract institutional investors.

When Might an LLC Make Sense?

• If the business is a small, bootstrapped, or lifestyle business with no plans to raise VC money
• If founders prefer pass-through taxation and want to avoid corporate double taxation
• If the company is an early-stage, pre-funding business that may later convert to a C corp

In summary, the C corp structure is optimized for growth, investment, and eventual exit, making it the default for venture-backed startups.

Now, let’s talk about Delaware for a bit. For a long time, Delaware was the best choice due to its business-friendly laws and investor trust. However, that trust has been eroded due to some recent surprising Delaware Court of Chancery (the Delaware business courts) decisions that have raised concerns over Delaware’s evolving legal environment, particularly court decisions that have empowered shareholders to challenge executive decisions more aggressively.

Key Factors Influencing the Exodus:

1. Judicial Activism: Delaware courts have recently adopted a more assertive stance on issues such as shareholder litigation and executive compensation. Notably, a Delaware Chancery Court ruling invalidated Elon Musk’s $53 billion compensation package at Tesla, signaling increased judicial scrutiny over executive pay. This has led executives to seek jurisdictions with more predictable legal frameworks.
2. Favorable Legal Environments Elsewhere: States like Texas and Nevada are emerging as attractive alternatives due to their business-friendly laws and specialized business courts. These states offer legal environments perceived as more favorable to management and controlling shareholders, prompting companies to consider reincorporation.

Examples of Companies Relocating:

• Meta Platforms: The parent company of Facebook is in discussions to move its legal incorporation from Delaware to Texas or another state, aiming to benefit from jurisdictions that offer more favorable conditions for companies with controlling shareholders.
• Pershing Square Capital Management: Led by CEO Bill Ackman, this hedge fund management company plans to move its incorporation from Delaware to Nevada, citing dissatisfaction with Delaware’s corporate laws.
• TripAdvisor: The company received approval from the Delaware Supreme Court to relocate its legal domicile to Nevada, a move driven by the desire to operate under a more management-friendly legal framework.

These developments have prompted Delaware officials to consider reforms to retain corporations. DE Governor Matt Meyer has acknowledged the need to address shareholder and management rights concerns to maintain Delaware’s status as a premier corporate hub.

About the Author(s)

Kevin Vela

Kevin is the managing partner at Vela Wood. He focuses his practice in the areas of venture financing, M&A, fund representation, and gaming law.

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