Last week, we talked about Eric getting sued. Today we’re sharing how Eric royally f*ed up when he started his education business.

(Sorry for roasting you again Eric. It’s for the readers, we promise… ❤️)

Eric did the unthinkable: he formed a California LLC instead of a Delaware C-corp.

OK, I’m being a little dramatic.

There’s nothing wrong with incorporating as an LLC. But when Eric sold his previous business, his tax accountant told him he made a huge blunder. Had Eric switched to a Delaware C Corp, he would have saved a ton of money on taxes upon his exit.

But why a C-Corp? And where is Delaware, anyways?

In this episode of Uncapped Notes, we’ll give you the rundown on:

1. Why Delaware C Corps are advantageous
2. How you can flip to Delaware if you haven’t already
3. A geography lesson on where Delaware is for the 1% of uncultured people like me

1st benefit: Delaware is business-owner friendly

Delaware has corporate governance laws that are basically simpler rules around compliance and in cases of things like lawsuits. These laws were written to help business owners stay in business.

Delaware is a business-favorable state. So it's more relaxed and easier to do business in Delaware in comparison to other parts of the US.

2nd Benefit: You’ll save a ton of money on taxes

This is Eric’s favorite benefit for forming a Delaware C-Corp: You can be exempt from paying lots of taxes when you exit.

How is this possible?

There’s this thing called the Qualified Small Business Stock (QSBS). If your biz is a Delaware C Corp and has been around for more than five years before getting acquired, you could be potentially exempt from paying federal taxes when your company gets acquired or IPOs.

That’s a huge deal.

Reminder: We’re not lawyers. Google QSBS and read all the nuances on Delaware’s official page.

All we’re saying is there’s a lot of potential federal tax exemption only available for Delaware C Corp businesses.

This benefit also applies to investors. They’ll be exempt from paying taxes in many scenarios thanks to QSBS. So everyone gets to keep more money upon an exit. 🥳

3rd Benefit: It’s favorable to buy shares as investors

Imagine Eric invests in Janel’s cycling software business and it’s doing really well. Like $20 million in revenue every year well.

In this hypothetical situation, Eric wouldn’t need to pay any taxes along the way… even though he’s a part owner of the business. Eric only needs to pay taxes on the gains that he’s made when Janel’s startup gets acquired or IPOs.

Just one of many unusual and wonderful treatments of taxes that you can find with Delaware C Corp structures.

How Eric f*ed up with not having a Delaware C Corp

Eric started a cool education business before Hustle Fund and incorporated it as a California LLC.

It was easy to set up, but an LLC didn’t have the same tax benefits as a Delaware C Corp. Eric ran it for 7 years before a media company offered to acquire them.

After the acquisition, you’d think Eric and the team would all be celebrating. But Eric’s tax accountant pulls Eric aside and says,

“I don’t know if you want to hear this right now but I think you made a critical mistake. Anytime before the acquisition, you could have easily converted the business to a Delaware C Corp. This meant you wouldn’t have had to pay a good portion of the taxes you already paid thanks to QSBS…”

Don’t feel bad for Eric. He got over it. Eventually... But we’re writing this piece so you don’t make the same mistake that Eric did.

It’s super easy to flip to a Delaware C Corp

There are lawyers and possibly automated legal services that can help you switch over to a Delaware C Corp.

So if you’re running a venture-backed business, switch to a Delaware C Corp and reap the benefits.

Also, I know 99% of you are probably more cultured than me. But for the 1% of us who have no idea where Delaware is, I found a map.