At Founders Workbench, our primary focus is helping entrepreneurs develop, start, and grow their startup businesses. Through our new “Founders Series” of posts, we use this blog to delve into various topics selected to broaden your perspective as a startup company founder. For our inaugural Founders Series post, we will examine one of the very first steps to creating a successful company: choosing the legal structure that will best suit the needs of the business and its owners.
Choosing the Right Structure
Generally, there are three key issues to consider when organizing a new business:
- limited liability of owners;
- ownership/management; and
Corporations and Limited Liability Companies (LLCs) are the preferred entities for startups because of the limited liability protection they afford owners.
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.
As a result, corporations are the most frequently utilized formation vehicle, particularly for companies seeking venture financing. In certain circumstances, shareholders can elect to have their corporation treated as a Subchapter “S” corporation for tax purposes, which results in pass-through treatment like an LLC.
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.
Check out our Document Driver®, an online solution that lets you generate documents to form a Delaware corporation. 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.
In upcoming posts in the Founders Series, we’ll provide more detailed discussions of the distinctions between LLCs, C corporations, and “S” corporations.