![]() ![]() This process allows for deferment of costs until institutional investors are willing to provide funds. Additional costs could arise if there is sufficient growth, such that the company requires conversion to a C corporation. You are short on cash: An LLC may be the most appropriate choice.Financial factors may weigh on the decision between an LLC and an S corporation. If raising venture capital in the future, an LLC can be converted to a C corp and S corp status may be removed. You are bootstrapping and it is uncertain whether you will move beyond personal investment and money from friends and family: A founder that intends to solely rely on personal finances, operating revenue, money from friends and family or small groups of individuals may elect an S corp or an LLC.You are starting your business and have an investor prepared to invest in you now: If you are forming with investment from institutional investors-non-individuals and non-friends and family-you will likely be forming a C corporation.The following scenarios may provide a general guide when making an entity selection: This could occur, for example, if an S corp takes an investment from a disqualifying stockholder, such as a venture capital fund. If the corporation no longer meets these requirements, the S election is revoked, and it will be taxed as a C corp. citizens or residents, but not partnerships, corporations, and non-resident aliens), not have more than 100 stockholders, have only one class of stock and not be an ineligible entity type (for example, certain financial institutions and insurance companies). The corporation must be a domestic corporation, only have certain persons as stockholders (such as U.S. If members of an LLC decide to seek outside investment or if investors express interest in investing in the LLC, the LLC may have to convert to a manager-managed structure or a corporation to secure investment.Ī corporation may elect S corporation status only if it meets certain requirements. LLCs are usually member-managed, unless the members elect to have managers control the LLC, similar to a corporation’s board of directors. Small or closely held businesses that will not seek outside investment may benefit from the ease of forming and the simple structure of an LLC. LLCs are generally less favored by investors. For example, preferred stock takes priority over common stock in liquidation proceedings. Preferred stock gives the holder superior rights over common stockholders. C corporations allow for multiple classes of stock, such as preferred stock and common stock. Most professional investors prefer C corporations. A corporation may elect to be treated as an S corp and instead be subjected to pass-through tax treatment like an LLC.Īt some point, the question of financing comes up. Therefore, C corporations may be subject to double taxation. ![]() If corporate income is distributed to shareholders as dividends, these distributions are taxed again at the individual level. C corps are subject to a corporate tax and thus pay taxes at the corporate level. By default, corporations are treated as a C corporation. These business structures get their names from the parts of the Internal Revenue Code they are taxed under. Two types of corporations can be distinguished S Corporations (“S corps”) and C Corporations (“C corps”). A corporation is formed under state law by the filing of articles of incorporation with the state and also provides limited liability to its owners (called “shareholders”). An LLC is an unincorporated association that provides limited liability to its owners (called “members”). Below are ten key items to consider that can guide an entrepreneur seeking to find the most suitable entity.įor most startup founders, the general entity structures that are commonly chosen are limited liability companies (LLCs) and corporations. The type of entity structure chosen not only has legal consequences, but also influences financing opportunities, equity compensation and taxation. One of the most common questions asked by entrepreneurs that have a new venture in mind is: what type of entity structure should I choose for my new business? This is an important question, which should be answered under careful consideration of the specific situation and the consequences that choosing one entity over another has.
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