What is the Best Way to Structure My New Business?
January 27, 2021
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, including a limited liability company (LLC), a C-Corp, or a professional corporation (PC), which is used for professional services such as such as doctors, lawyers, accountants, etc.
LLCs are simpler to set up than C-Corps and less cumbersome with annual minutes, taxation and reporting and therefore may be the best option if an organization:
- Has one owner or just a few owners/members
- Does not intend to raise money from investors in the future
Many startups begin as a limited liability company (LLC) but find the need to change to a C-Corp at a later date. Incorporating from the start, however, is less complicated and less expensive than a subsequent conversion to a C-Corp. Additionally, 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 many startups, 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 four reasons your startup should incorporate as a C-Corp instead of a limited liability company:
- 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 (which doesn’t expire until 2025) 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, which could result in a loss of control. 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.