Nellie Akalp is CEO of CorpNet.com. Since forming more than 100,000 corporations and LLCs across the U.S, she has built a strong passion to assist small business owners and entrepreneurs in starting and protecting their business the right way. LIKE the CorpNet.com Facebook page for exclusive discounts and giveaways! To learn more about Nellie and see how she can help your business get off the ground quickly and affordably, please visit here.
Starting a new business involves a seemingly endless line of important decisions, from company name, to logo, to even the product or service you’ll be offering. Among these decisions, one of the most important (and often overlooked) is business structure.
The business structure is the legal form of your company. The three most common structures in the U.S. are the C Corporation, S Corporation, and LLC. As an entrepreneur, you need to carefully consider which is right for you. Do you need to avoid personal liability if your company is sued? Will you have a partner and/or investors? Do you want the business to pay its own taxes or carry the profit/loss over to your personal returns? And lastly, are you planning on VC funding?
When it comes to VC funding, the answer is relatively simple: The C Corporation is the best option for anyone seeking funding from an angel investor or venture capitalist for several reasons.
Benefits of a C Corporation
A C Corporation lets you manage multiple classes of stock (i.e. common and preferred). This flexibility is necessary if you plan on raising multiple funding rounds. If you plan on offering stock options down the road, you’ll also be able to issue different classes of stock.
The other two corporations, LLC and S Corporation, have a tricky pass-through tax treatment for VCs, since it results in UBTI (unrelated business taxable income) for them. Meanwhile, only the C Corporation lets you easily transfer stock (another big requirement for VCs).
Some VCs actually have specific conditions written that prevent them from investing in any entity besides a C Corporation. That alone would seem to make the decision pretty simple. If you’re considering angel or VC funding, the C Corp is the way to go.
But, of course, like anything in business, things aren’t always so simple. C Corporations can be overkill for small businesses. The amount of paperwork involved with the C Corp is significant, and there is also something known as “double taxation.” Unlike the LLC or S Corporation, the C Corporation is taxed separately and must file its own taxes. In some cases, the owners of a C Corporation can end up with a pretty hefty tax burden as they need to pay taxes on both the corporation’s profits as well as whatever income or dividends they personally collected.
Two Routes to Creating a C Corporation
Considering all those factors, there are two routes for the new business:
Create a C Corp from the start: You may have more paperwork and you may have to pay more in taxes in the beginning, but if you definitely plan on seeking VC funding (and within a relatively short time frame), you might as well start as a C Corp and save yourself the hassle.
Create an LLC then convert to a C Corp later: This option should be pursued only if you truly aren’t sure you’ll ever look for VC funding or if your plans are many years down the road. The LLC gives you a low-frills way to protect your personal assets and track ownership.
The specific steps for converting from an LLC to a corporation will depend on the corporate laws in whatever state your LLC is registered. In many cases, you’ll be creating a new C Corp and then making the original LLC a subsidiary of it. This is a relatively standard process and your attorney or online legal filing service will be quite familiar with the steps required.
Too often, in the flurry of startup chaos, many entrepreneurs fail to properly consider their business structure options. If you’re just starting out, you should review the pros and cons of each in light of your situation today, as well as what may be down the road.
Original Article By: Nellie Akalp
Image courtesy of Flickr, boman818