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US Expansion: Establishing a Delaware C Corporation for European Venture-Backed Tech Startups + FAQ

In this three-part blog, we will delve into key benefits that make Delaware an attractive jurisdiction for European venture backed tech startups looking to launch their US market presence for the first time, the steps required to establish a Delaware C Corporation, then provide answers to the most frequently asked questions we get regarding Delaware C Corporations.

Why Establish a Delaware C-Corporation?

Many entrepreneurs from the UK and Europe have heard through their advisors and peers that they should create a Delaware C Corporation for their US subsidiary, but they aren’t clear as to why. Here are the top reasons why a venture backed tech company from the UK or Europe would want to create a Delaware C Corporation for their US subsidiary instead of incorporating in one of the other 49 states in the US:

Favorable Corporate Laws:

Delaware boasts a long history of corporate law expertise, with a dedicated court system, the Court of Chancery, specializing in resolving business disputes. Its robust legal framework, including the Delaware General Corporation Law (DGCL), provides flexibility, predictability, and stability for businesses. The DGCL offers clear guidelines on corporate governance, shareholder rights, and fiduciary duties, enabling startups to operate within a framework that is widely understood and respected.

Business-Friendly Court System:

Delaware's Court of Chancery is composed of experienced judges who possess deep knowledge and expertise in corporate matters. The court's efficient and predictable procedures, along with the absence of jury trials, allow for prompt and informed decisions on corporate disputes. This stability and predictability contribute to an environment that is conducive to business growth, attracting investors and fostering confidence in the legal system.

Investor Familiarity:

US venture capital investors will almost certainly be investing their money in your parent company in the UK or Europe and not the US C Corporation subsidiary. Unless of course, your company is moving its global headquarters and team to US and operating under the Delaware C Corporation. Regardless, creating a Delaware C Corporation for your US subsidiary will be preferable for US investors since the governance rules and laws are well understood by their legal teams. Having a US subsidiary that’s a Delaware C corporation will streamline at least that one aspect of the due diligence process.

Flexible Corporate Governance:

Another advantage of establishing a Delaware C Corporation is the flexibility it offers in terms of corporate governance. Delaware allows for the creation of different classes of stock, enabling startups to customize their capital structure based on the specific needs of the company and its shareholders. Delaware's corporate laws also provide considerable flexibility in determining board composition and provides strong director protections.

How To Establish a Delaware C Corporation

The following are steps required to establish a Delaware C Corporation. While there are online services that can facilitate the creation of a Delaware C Corporation, we strongly encourage using a US law firm to ensure your US subsidiary is structured properly from the start.

Create and File Articles of Incorporation:

The first step in forming a Delaware C Corporation is preparing and filing the Articles of Incorporation with the Delaware Secretary of State. The Articles typically include essential information such as the company's name, purpose, authorized shares of stock, registered agent details, and the names and addresses of the initial directors. This document establishes the legal existence of the corporation.

Establish and Document Corporate By-Laws:

Corporate By-Laws outline the internal rules and regulations that govern the corporation's operations, including shareholder rights, board meetings, voting procedures, and officer responsibilities. These By-Laws should be carefully crafted to align with the specific needs and goals of the European parent company. It is essential to consult legal counsel to ensure compliance with Delaware laws and to tailor the By-Laws to the company's unique requirements.

Identify and Name Corporate Officers:

A Delaware C Corporation must have named officers, typically including a President, Secretary, and Treasurer. The officers are responsible for overseeing day-to-day operations, financial matters, and corporate governance. The specific roles and responsibilities of these officers should be defined in the Corporate By-Laws. The named officers play a crucial role in the corporation's management and decision-making processes.

Hire a Registered Agent:

A registered agent is a designated individual or entity responsible for receiving legal and official documents on behalf of the corporation. Delaware law requires all corporations to maintain a registered agent with a physical address in the state. The registered agent ensures that the corporation stays compliant with legal obligations and receives important notifications, such as lawsuits, tax notices, and official government communications.

Frequently Asked Questions About Delaware C Corporations

Does my company have to have an office in the state of Delaware if we create a Delaware C Corporation?

No, your company does not need to be physically located in Delaware to create a Delaware C Corporation. Delaware's business-friendly environment and well-developed legal system make it an attractive jurisdiction for incorporating companies, regardless of their actual physical location. Your US subsidiary can be headquartered in any city or state in the US as a Delaware C Corporation and can have multiple office locations throughout the US.

Can a non-US citizen or resident be listed as an officer or director of my Delaware C Corporation?

Yes, a non-US citizen or resident can hold positions as an officer or director in a Delaware C Corporation. There are no citizenship or residency requirements for officers or directors of a Delaware C Corporation. However, it is important to consult with legal counsel to understand any potential visa or immigration considerations that may arise if non-US citizens are involved in the day-to-day operations of the company in the United States.

How much should I budget for creating a Delaware C Corporation?

The costs associated with creating a Delaware C Corporation can vary depending on several factors, including legal fees, filing fees, and any additional services required. Generally, budgeting $2,000 to $4000 is a reasonable estimate. Engaging legal counsel is crucial to ensure compliance with Delaware laws and to navigate the complexities of the incorporation process. Legal fees may vary based on the complexity of the corporate structure, drafting the necessary documents, and the involvement of additional services such as a registered agent.

What are the ongoing compliance obligations for a Delaware C Corporation?

Maintaining compliance with Delaware's legal requirements is crucial for a Delaware C Corporation. It includes filing annual reports and paying franchise taxes to the state. The specific obligations and deadlines can vary depending on the company's structure and revenue. Consulting with legal and accounting professionals can help ensure ongoing compliance.

Can I change the corporate structure or state jurisdiction after forming a Delaware C Corporation?

Yes, it is possible to change the corporate structure or jurisdiction of a Delaware C Corporation if needed. However, this process can be complex and may involve legal considerations, such as tax implications and regulatory requirements.

What are the tax implications of establishing a Delaware C Corporation?

Delaware's corporate tax laws are favorable for businesses. While Delaware does not impose state income taxes on corporations that do not operate within the state, federal taxes still apply. It is crucial to consult with tax professionals to understand the overall tax implications, including potential obligations in the state(s) where the company conducts business or has a physical presence.

Are there any disadvantages to forming a Delaware C Corporation?

While Delaware C Corporations offer numerous benefits, there are some potential disadvantages to consider. Delaware has relatively higher franchise taxes and annual fees compared to some other states. Additionally, if your company does not have a substantial presence in the United States or plan to seek venture capital funding, forming a Delaware C Corporation may not be necessary, and alternative structures or jurisdictions might be more suitable.

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