Incorporating as C-Corporation vs. LLC
The general consensus is that startups seeking venture capital should incorporate as C-Corporations, not LLCs. C-corp revenues will be “double taxed”. C-corps have regulatory requirements to stay in good standing like holding board meetings and taking minutes. This requires investments of time and money.
When to Incorporate a Startup
The common convention is that investors prefer C-corps over LLCs. As soon as you’re ready to take steps like forming a team, building the idea, entering contracts, seeking funding, or making a sale.
LLCs or C-corps for Startups?
If you’re planning to start a business, you will likely need to form a legal entity. The current common structures are LLCs and C-corps. LLCs provide liability protection and pass-through taxation. Many sources say C-corps are best for raising capital. Investors often require startups to convert to C-corps. But LLCs can also be good for startups. Most don’t become profitable, but an LLC allows carrying losses forward to offset future taxes.
FAQ about LLCs and C-corps
- Many entrepreneurs are drawn to limited liability companies because an LLC is a highly flexible customizable entity through which a company could set up structures similar to a corporation.
- In contrast to an LLC, C-corp revenues will be “double taxed,” first at the corporate level and then at the individual shareholder level when distributions are made.
- Another benefit of choosing an LLC over a C Corp is its tax benefits as profits pass directly through each member’s personal income taxes instead of being taxed at both corporate levels.
Making the Right Choice
When deciding which entity type is right for you, the main question is whether your company will be attracting investments from angel investors or venture capital funds.
Corporations and Limited Liability Companies
A corporation is a more complex business entity that designates a business as a formal legal entity. Corporations are also created through registration with the state and provide limited liability, protecting the assets of their owners.
Benefits of a Limited Liability Company
On the other hand, if you wish to protect your personal assets but don’t want to form a C or S corp, another option is to form a Limited Liability Company (LLC)—which is the most common organizing structure for small businesses.