Startups: What Type of Corporation Should You Form?
There is no substitute for having people, a mission, business model, and a market strategy for your business. But there is arguably a close second: setting up your company properly. Keeping these things in mind, you want to create a legal structure that will enhance your strategy and endure.
What is a corporation?A corporation is an entity having authority under law to act as a single person distinct from the shareholders who own it and having rights to issue stock and exist indefinitely. There are different types--including the S-corp, LLC, and C Corp, as well as different places to file such as California and Delaware.
What is an S-Corp?An S-Corporation is a corporation whose income is taxed through its shareholders rather than through the corporation itself. It has a limited number of shareholders (100 in California). In California, there is a 1.5% tax on its net income.
What is an LLC?A Limited Liability Company (or LLC) is authorized by statute in certain states and is characterized by limited liability, management by members or managers, and limitations on ownership transfer. The LLC is also typically more tax advantageous as profits flow through to the members. There are typically less corporate formalities such as Board of Directors, quarterly filings, etc.
What is a C Corporation?A "C corporation" is a corporation whose income is taxed through it rather than through its shareholders. Any corporation that does not make an S election to be an S Corp is a C corporation by default. The C Corporation is the corporation through which companies issue an IPO, or initial public offering of the company's securities to the public.
Which is Right for You?So which is right for you? It depends. Here are some questions to ask.
Are you planning to have investors?
If you have investors, how many investors do you anticipate having?
Where is your principal place of business?
Do you anticipate having the capacity for corporate formalities such as an active Board of Directors, regular meetings, and regular correspondence with investors and/or the Securities and Exchange Commission?
Do you plan to have officers of the corporation? If so, how many officers or executives will be in your company?
Are you looking for a structure to provide tax advantages to a finite number of investors (i.e. under 100)?
Do you plan to offer securities and take the company public in the future?