One of the first steps in creating a successful company is choosing the legal structure that will best suit the needs of the business and its owners.
Forming Your Start-Up
Deciding which structure is best depends on three key factors:
- limited liability of owners
Corporations and Limited Liability Companies (LLCs) are the preferred entities for start-ups because of the limited liability protection they afford owners.
Corporations are the most frequently utilized formation vehicle, particularly for companies that anticipate seeking venture financing.
LLCs are pass-through entities that are not subject to a separate level of tax and can provide founders with lots of flexibility when it comes to governance issues. On the other hand, LLCs are often more complex, which means higher initial costs, and certain venture capital funds are hesitant to invest in LLCs because of tax considerations and the aforementioned complexity.
Subchapter “S” corporations offer pass-through treatment like an LLC if certain requirements are met.
To learn more about the differences between these entities, see Tax Considerations for Startups.
Additionally, if a principal purpose of your start-up is to provide a material positive impact on society and the environment, then you may wish to form a Benefit Corporation, which is generally subject to the same corporate laws as other corporations but differs in terms of purpose, accountability and transparency. Read more about Benefit Corporations.
Location of Organization
Another consideration is where to organize your new business. Regardless of whether you are organizing an LLC or a corporation, Delaware has the most developed body of law for business entities and is generally accepted by investors, counterparties and acquirers. In fact, if you incorporate outside of Delaware, many potential institutional investors will require you to reincorporate in Delaware as a condition of their investment.
Our Document Driver® enables you to generate documents to form either a Delaware corporation or LLC. Before using Document Driver® you should consult your tax, accounting and/or legal advisors to determine the type of entity and jurisdiction of organization that best suits your needs.