The C-Corp Advantage for Startups
July 22, 2019
There are numerous ways a business can be structured. As the founder of a startup, you need to have a good understanding of your options when setting up your new business. While many startups begin as a limited liability company (LLC) and change to a C-Corp at a later date, incorporating from the start is less complicated and less expensive than a subsequent conversion to a C-Corp. Plus, the fees a law firm charges to convert an LLC to a corporation will be more than setting up a corporation in the first place. C Corporations are the most desirable structure for a startup, because it limits liability, protects intellectual property, is more attractive to investors, and allows the issuance of stock options to incentivize strategic hires and key employees.
Here are five reasons your startup should incorporate as a C-Corp instead of a limited liability company:
- Less personal liability. As a C Corporation, a separation between the founders (who become shareholders) and the business is created. By incorporating your business, the generated entity can do most of what you do, but is ultimately a buffer, so that if anything in the business goes wrong your assets outside of the company are not at stake.
- Ownership of intellectual property. Incorporating gives you a sense of ease when it comes to who owns intellectual property. Any IP is owned by the business and not by any founder/ employee who may have created it. This is a great idea for a few reasons. One, this means that as your business grows and employees come and go, they cannot take any of the intellectual property with them. This safeguards the business from any claim a former employee may think they have when they leave. Another reason this is important is that adequately protected intellectual property can be considered to increase the valuation of a company for investors.
- The untold reality of taxation. While it’s true that C-Corps are subject to double taxation, both at the corporate level and then again at the individual shareholder level, this is not the reality of most high growth startups. These startups tend to reinvest capital and not pay out dividends for several years, which negates the second tax burden. Payments to founders can also be structured as salary payments rather than dividends, which can be written off for tax purposes. In addition, the 2018 tax bill was a big win for C-Corps with a new lower corporate tax rate.
- Equity options. If your business is formed as an LLC, the only option for giving your employees equity would be to share your own membership interest in the company. The corporation structure allows you to put aside an option pool of stock for key employees and strategic partners. This is an easy way to offer incentives to get people involved in your startup.
- Attractive to investors. As a startup, you want to make it easy for investors to invest in your company. As a C-Corp, you are more attractive to investors, and most investors will insist on this structure before putting in any investment money. Venture capital firms are usually not allowed to invest in LLCs or S-Corps, so already being a corporation is ideal for those seeking outside investment.
Looking for more information or guidance in your startup? At Forrest Firm we are dedicated to helping startups and new businesses explore all of their options in order to reach their greatest potential. Consider contacting me to help you fully understand your options when starting your new business.
Virginia Pleasants focuses her practice on estate planning, estate administration, and general business law. She works with clients to establish estate plans that efficiently transfer wealth to the next generation, including the preparation of wills, trusts, and powers of attorney. Virginia may be contacted by phone (336)546-5977 or email firstname.lastname@example.org