There’s a lot of information floating around on whether to form a limited liability company (LLC), C-corporation, or S-corporation. Realizing that it can be pretty difficult to synthesize, I’ve compiled this cheatsheet of sorts to help you decide what’s right for your startup and ultimate goals.
Bottom line: If you intend to raise capital at any point, you probably want to form a C-corp.
- Multiple classes of stock – this allows you to give preferred stock to investors, and common to yourself, employees and advisors.
- Double taxation – the C-corp gets taxed on its corporate income, as well as shareholder dividends/earnings.
- Perpetual life – the C-corp won’t dissolve unless you want it to.
- Formalities – a C-corp creates a slew of formalities that aren’t required in an LLC, such as various Board of Director approvals, Shareholder approvals, Action by Incorporator, Annual meetings, and stock plans.
- Inflexible payment to shareholders – any payment or dividends from the C-corp must be doled out according to the % of ownership that the shareholder has, and cannot deviate.
Bottom line: You probably won’t be able to raise capital with an S-corp, but you can avoid double taxation and issue stock as payment.
- Only one class of stock – it is unlikely that an investor would accept common stock only.
- Single taxation – S-corps avoid double taxation, and are only taxed on shareholder earnings, and not corporate income.
- Perpetual life.
- Inflexible payment to shareholders.
- Limited # of shareholders – this is the reason that S-corps are also known as closely-held corporations. An S-corp is limited to 100 shareholders, and they must all be domestic, US citizens and actual people as opposed to corporate entities.
Limited Liability Company
Bottom Line: LLCs are typically created for tax purposes and with no eye towards expansion, but are easily converted if there is investment potential.
- No stock – LLCs cannot issue stock; they can give out ownership of the LLC, but that is considerably more complicated than issuing stock to employees or investors.
- Single taxation – LLCs similarly avoid double taxation, and are only taxed on the profits.
- Limited life – LLCs can end upon death or incapacity of one of the members.
- Fewer formalities – there are no shareholders or directors to deal with.
- Flexibility in dividing income – income from the LLC doesn’t have to be doled out solely in accordance with the % of ownership.