Have you ever wondered why the majority of venture capital SPVs and funds use the Delaware LLC structure? While it may seem like an arbitrary choice, careful consideration has gone into the use of this structure in VC.

Using a Delaware LLC to structure your investments does not require you to be located in Delaware or to be investing within Delaware. While conventional businesses generally have to register and pay taxes in whichever states they “do business,” investing entities have more flexibility. Investing entities are largely exempt from the  idea of “doing business,” which allows them to choose their state of formation.

To understand why most investors and service providers choose the Delaware LLC, we’ll dive into the cost, formation, tax, and legislative implications of the structure below.  

Cost

On the surface, Delaware is not the cheapest state to register an LLC. Delaware charges $300 annually to create an LLC, while Arizona only charges $50.   However, the Delaware structure may actually be cheaper in the long run for those who are establishing a high volume of investment vehicles. This is because Delaware allows for the creation of series LLCs at no additional cost. While other states require a separate operating agreement be filed for each series LLC, Delaware simply requires the Master LLC operating agreement to mention the formation of series LLCs. This removes the need for additional filings. Delaware remains one of very few states that makes it easy to form series LLCs. Delaware series LLCs are also bankruptcy remote, can enter into contracts, and hold title to assets. All these characteristics make the Delaware series LLC an attractive structure for SPVs. 

Formation 

Delaware has one of the most straightforward processes to form an LLC. The process requires that you have a registered agent (a person designated to receive the business’s official papers) and file a cover memo and a Certificate of Formation with the Division of Corporations. You are not required to have a written operating agreement (although advisable), and you do not have to hold and record board meetings. 

Because Delaware is committed to being business-friendly, filings are processed quickly, and their office is open until midnight on Monday - Thursday and 10:30pm on Fridays.

Tax Benefits

Delaware does not impose income tax on LLCs that do not conduct business within the state. Because investing does not fall into the category of “doing business,” investors typically do not have to worry about Delaware tax liability. Additionally, you are not required to register with the Delaware Division of Revenue or hold a business license.

Legislation

To settle business disputes, Delaware formed a special court called the Court of Chancery. This means that  entities registered in Delaware benefit from  the following:

• A robust body of case law, which provides predictability and guidance.

• Specialized corporate law judges who give prompt expert attention to disputes.

• Typically, the court will side with decisions made by company leaders so long as those decisions are determined to be in the best interest of members.

  
  

Summary 

Since different jurisdictions provide different benefits, finding the right combination of benefits for your specific use case is key. In venture investing, for now, Delaware offers just that. However, this may change as other states attempt to attract more business. Sydecar is constantly exploring cost, structural, and tax benefits across jurisdiction  so that we’re able to offer the optimal entity set up for our customers. If there is a specific jurisdiction that you would like to see added to our roadmap, don’t hesitate to reach out!