What’s the Best Corporate Structure For a Startup
Brad Feld the VC:
C-Corp: If you are going to raise VC or angel money, a C-Corp is the best (and often required) structure. In a VC / angel backed company, you’ll almost always end up with multiple classes of stock, which are not permitted in an S-Corp. Since a VC / angel backed company is expected to lose money for a while (that’s why you are taking the investment in the first place!) the double taxation issues will be deferred for a while, plus it’s unlikely you’ll be distributing money out of a VC / angel backed company when you become profitable.LLC: Often an LLC (Limited Liability Company) will substitute for an S-Corp (it has similar dynamics) although it’s much harder to effectively grant equity (membership units in the case of an LLC vs. options in an S-Corp or C-Corp – most employees understand and have had experience with options but many don’t understand membership units.) LLC’s work really well for companies with a limited number of owners; not so well when the ownership starts to be spread among multiple people.
via StartupFever.
Brian Balfour on February 7th, 2006 10:11 am
Actually from my experiences with the multiple startups I have started (some funded, some not) it is better to start out as an S corp. Why? It is very easy to switch your classification from an S corp to a C corp, but very difficult to switch from a C corp to an S corp.
It is great to think that you might get VC funding from the start, but you never know what might happen. It could be a couple years, it could be never. And if you end up with a couple independent angel investors, they and yourself as an owner are going to want an S corp to avoid the double taxation.
See my blog by clicking on my name below for more information. I’m going to write a longer post about this later today.
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