Ph. 404.348.4462 | Fax 404.549.6765 | P.O. Box 922873, Norcross, GA 30010

Should my startup be an LLC, S-Corp, or C-Corp?

Posted by on Thursday, January 12, 2012

You should form a corporation. Whether it begins as an S-Corp or a C-Corp depends on whether you will immediately seek investors, or whether you plan to operate for a few years and seek the S-Corp tax advantages.

Limited Liability Companies (LLCs) are popular among many accounts and lawyers. They are, however, very unpopular among investors. Some investors simply cannot invest in LLCs. Others just do not want to deal with the hassle.

A quick breakdown of the features of each follows:

C-Corporations

  1. Limits liability to the assets owned by the Corporation.
  2. Allows multiple classes of shares to be issued. (Preferred and Common.)
  3. Preferred by investors.
  4. Unlimited shareholders. (Although SEC reporting requirements will kick in at some point.)
  5. Double taxation. (Although this is not a big problem if your company is not making money initially.)

S-Corporations

  1. Limits liability to the assets owned by the Corporation.
  2. Allows only one type of share to be issued. (Common stock.)
  3. Cannot have more than 100 shareholders.
  4. Shareholders must be U.S. citizens or legal residents.
  5. Shareholders cannot be other companies.
  6. Can be converted into a C-Corporation quickly. (S-Corporation is a tax election, not a legal formation choice.)
  7. Pass-through taxation of profits and losses.  (This is why accountants love S-Corporations.)

Limited Liability Companies (LLCs)

  1. Limits liability to the assets owned by the Company.
  2. Allows ownership to be designed in any way the members of the Company desire.
  3. Can have unlimited members (owners).
  4. Pass-through taxation of profits and losses. (This is one reason why accountants love LLCs.)
  5. Simple management—no annual meeting requirements and other formalities required for Corporations.
  6. Incredibly flexible, but this also means each LLC has the potential to be dramatically different from one another.
  7. Investors do not like LLCs.

Conclusion

Whether you choose a C-Corporation, S-Corporation, or a Limited Liability Company will depend on your short-term and long-term strategic goals. While I prefer C-Corporations, each client’s situation is different. You should consult with your legal team and tax team (AKA, lawyer and CPA) to determine which legal entity fits you best.

You can also read about what other lawyers think about which legal entity is the best for new companies.

Joe Wallin at StartupLawBlog prefers C-Corporations for startup companies. (Companies typically seeking early investing.)

Ryan Roberts over at Startup Lawyer also prefers C-Corporations for startup companies.

Yoichiro (“Yokum”) Taku over at Startup Company Lawyer outlines the benefits and disadvantages of each type of legal entity, but also notes that he avoids LLCs and generally works with C-Corporations when it comes to startups. (He works with many tech startups.)

Comments are closed.