There are ways to avoid "double tax" exposure for a period of time, but as your company grows, "double tax" will be inevitable for the successful C-Corporation. Many entrepreneurs want to avoid this "double tax" exposure. This "double tax", as it were, means that the corporation pays tax on its profits at the end of the year (reported on the company's income tax return), and when the corporation makes a distribution to the founders (and/or other shareholders), the founders/shareholders also pay tax (hence, a "double tax") on the distributed amount on their personal income tax return. The most significant drawback to a C-Corporation is the potential for negative tax treatment. C-Corporations tend to be more formal and more expensive to operate than other forms of corporate entities. Venture Capital firms generally favor C-Corporations because only C-Corporations may issue preferred stock and have stockholders other than individuals. Most corporations (and practically every large company) are organized as C-Corporations because they appeal to a larger group of investors. If you are seeking Venture Capital funding, a C-Corporation may be the best fit for your business. This is not an exhaustive list, but are the most common business entities used for start-up ventures.Ĭ-Corporation: A C-Corporation is a type of corporation. With this background, consider the following specific types of entities for your business. Also, like any person, the company pays taxes. The founders are generally not liable for the debts of the company. Just like you and me, the liabilities of the corporate entity are limited to its own assets. This means that they exist as a separate "person", that can, for example, buy and sell goods, employ people, enter into contracts, and take any other action that any person can do. All corporate entities are recognized as a separate legal entity. The partnership agreement also provides for the rights of the partners with respect to the company.įirst, a little bit about corporate entities. The partnership is governed by a partnership agreement which states how the partnership is to be operated. Partnership: A Partnership is owned by the partners, who have a "partnership interest" in the partnership. The operating agreement also provides for the rights of the members with respect to the company, and in particular, the members' respective exit rights. The LLC is governed by an operating agreement which states how the company is to be operated. Limited Liability Company (LLC): A Limited Liability Company (LLC) is owned by its members (as opposed to shareholders) who have a membership interest(as opposed to stock) in the company. The shareholders may decide to define the rights between them through a shareholder agreement. The corporation is governed by a set of bylaws which states how the corporation is to be operated. Generally, there are three main types of entities to choose from: Corporations, Limited Liability Companies and Partnerships.Ĭorporations: A Corporation is owned by its shareholders, who buy stock or shares in the company in exchange for consideration. What are the typical corporate entities to choose from? The investment path you choose will pay a significant role in the corporate vehicle you select for your company. However, after your "founder funds" are exhausted (self-funding), you will need to either sell your company, or seek investment from one or more of the following Private Equity sources: Many founders start their company with their own funds on a "shoe string", focusing their resources on developing the "big idea" and bringing the product to market. How do you know what entity is the best fit?Ī good starting point for making this determination is to ask yourself: " How am I going to fund my company?" The goal of the founder is to choose an entity that (1) "fits the business model" for the venture, and (2) makes the company "attractive" to investors. Selecting the right corporate vehicle for your business is critical to your success. What type of corporate entity is best for my business?Īs a founder/entrepreneur, you (and your partners) have an idea for a new venture are willing to invest your time and money in the start-up of a new business.
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