Starting up: How to Open a Startup in Delaware

Welcome to this thorough guide on forming a C-Corporation Startup in Delaware. If you want to know everything that needs to be done when the first investor agrees and establishes a legal business into which they can invest, read on. Follow this article which will to equip you with the knowledge and actions you need to successfully create your Startup in Delaware.

Why Choose Delaware for Your Startup

How did we get to Delaware & why bother with C-corp? First things first. Delaware is most known for its beautiful beaches and is the first state without state taxes. Now you can probably guess that startup funders and investors really enjoy the laid-back beach life …

A C-corp is a legal organization that protects its owners from personal liability while allowing the company to attract a larger pool of possible investors. This makes it a little more challenging to manage due to tax and state regulations, but Delaware has it covered.

Venture capitalists (VC), institutional and private investors nearly always require companies to be incorporated as a C-corp when investing. Delaware’s local environment is predictable, and they usually have their contracts adapted to this us state. If you're considering incorporating anywhere else, you should definitely have a good cause.

The Right Time to Consider Delaware

If you're thinking about forming a C-Corporation for your startup, you should start thinking about Delaware early on. Choosing Delaware as your jurisdiction has various benefits, including access to favorable corporate laws and a business-friendly environment. By considering Delaware from the beginning, you can ensure that your startup is optimally formed and positioned for growth.

Before you consider forming a startup anywhere, it would be incredibly helpful if you had some indication of a good market fit - don’t take it lightly.

And if you’re not there yet - don’t worry. Prepare yourself and learn how to get from Prototype to pre-seed funding from our previous article How We Build a Prototype in 6 Weeks, Got Traction, And $200.000 Pre-seed Funding.

Steps to Open a Startup in Delaware

Now that we understand why Delaware is an attractive choice for startups, let's delve into the step-by-step process of opening a startup in the state.

1. Third-party Startup Establishment

The first things you should learn about are business registration services. They are usually an easy-to-use platform for forming a company that arranges the most necessary things for you during the startup registration. And the best thing is helping you launch your startup from anywhere in the world.

In our case, we partnered up with Stripe Atlas and had a great experience. There are several more startup registration platform options to consider, like: LegalZoom, Incfile & Northwest Registered Agent which offer a comprehensive range of services, including business formation and ongoing personalized support. Partnering with these trustworthy platforms can help to speed up the registration process while also ensuring compliance with Delaware's regulatory standards.

The following are vital steps for you to do at this time:

• Define how many shares the company will issue. If you have no special reasons, issue 10,000,000.
• Do not distribute everything among the founders, but put as much as 20% aside and divide the rest. So you have enough shares for Share Option Plan (ESOP) employees and first-time investors
• Apply for an Employer Identification Number (EIN) from the Internal Revenue Service (IRS). The EIN serves as a unique identifier for your C-Corp and is necessary for tax purposes, hiring employees, and opening a business bank account. You can apply for an EIN online through the IRS website.

2. Finding the Right Bank for Your Startup

Setting up a separate business bank account is essential for managing your startup's finances effectively. Choose a reputable bank and gather the required documents, as you can apply to open an account only when you already have your EIN and business registration information.

We use Mercury Bank, which specializes in startup banking and so far have only been satisfied. Well to be fair, Mercury is a financial technology firm rather than a traditional bank. Their bank services are provided by Choice Financial Group and Evolve Bank & Trust, both FDIC-insured.

It is important to select a bank that has fund coverage up to a particular extent so that you do not experience what Silicon Valley Bank did.

It's also recommended to establish a reliable accounting system to track your startup's income using accounting software like QuickBooks or Xero. Seek professional assistance to ensure accurate record-keeping, tax compliance, and informed decision-making. Maintaining solid financial management ensures your Delaware startup's legitimacy and long-term success.

3. Taxing and Regulations

You can take that with a grain of salt as long as you don't make any money, but once the transactions start flowing in, you'll need someone to handle it for you. We recently dealt with Cleer Tax and they are satisfactory.

When you have everything else in order, you have two extremely critical deadlines, you can not miss:

• March 1st: Delaware Annual Franchise Report filing deadline. Due date to pay a minimum of $400, or maybe more if you have significant funding. You can estimate this franchise tax using the official Delaware Franchise Tax Calculator.
• April 18th: C-Corp Form 1120 Tax Return due date. The Federal Form 1120 is the U.S. Corporation Income Tax Return, which the IRS (Internal Revenue Service) has companies use to report their income, losses, credits, etc., and to figure out the income tax liability of the corporation. The deadline can be extended to the 16th of October.

4. Choose the Right Legal Service Provider for Your Business

You absolutely require the services of a law firm to handle things like the issuance of new shares, drafting contracts, intellectual property protection, and compliance with state regulations. Look for providers with expertise in Delaware corporate law and a strong track record of assisting startups.

For this purpose, we chose LawBite services and were quite impressed with their online lawyers and legal advice system.

If you don't know what you're doing, don't handle legal matters yourself.

Some other popular options include LegalZoom, Incfile, and Rocket Lawyer. These platforms offer a range of legal services, such as business formation, contract drafting, and legal consultations. Additionally, you can consider hiring local law firms that have expertise in Delaware corporate law. By choosing the right partner, you can navigate the legal landscape with confidence, minimize potential risks, and focus on building a successful startup in Delaware.

5. C-Corp pay-outs

Ok, imagine you already got the proposed investment in your C-corp startup, but now require a monthly income to survive, like all of us. The right question for you is How to get paid while managing a C-corp?

There is a possibility to work/employ yourself in the C-corp startup, but we took the other path. We haven't done so because it puts you in an unsafe tax zone with vague personal taxes - if we have a legal business in the US and reside in Europe.

There is a possibility to work/employ yourself in the C-corp startup, but we took the other path. As we live in Europe but were working in the States, we haven't done so because it puts you in risky tax territory of undefined personal taxes.

If you reached the point where you have an investment, you most likely have some type of legal entity in your native nation where you live. If not, you might want to reconsider opening it. Another beautiful aspect of a C-corp is that employees are not required. So in practice, you can send invoices for your services from your local entity to the C-corp. The legal relationship in this scenario is that you work as a subcontractor for the C-corp.

And If you’d like to learn more on How to get your money out of your C-corp, watch this video from Carl Zoellner, a senior attorney at Anderson Business Advisors who specializes in asset protection and tax planning.

6. Important Takeaways

While managing a C-corp, registered in Delaware we learned a thing or few and gained business management experience for a lifetime. Here are the key outtakes we’d like to share with you:

• Even if it all sounds straightforward, the C-corp legal structure adds a lot of responsibility and, most importantly, more work. So deeply consider when registering a startup and only set for the C-corp if you have no other option (for example you have previously agreed on the investment and know you will receive it).
• If corporate income is transferred to business owners as dividends, which qualify as personal taxable income, a C-corp may face double taxation.
• Do not simply sign any documents that an investor gives you. If something seems suspicious, check it out with your lawyer and propose changes. A two-way roadway exists. They value you equally to what they value in them.
• Keep in mind that having everything in order with your C-corp will cost you around $5,000 every year. Some business owners say it can be less, but don’t count on that so there are no surprises.

7. The most important Startup Lesson

Building a startup requires you to devote all of your attention to achieving market fit and delighted consumers. Bureaucracy saps this vitality, thus strive to operate "lean" as much as possible and avoid complicating things with bureaucracy unless absolutely necessary. C-corp does not give you wings; it gives you a burden to bear.