• December 2019
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Incorporation: How should you structure your startup?

The best answer is; it depends. I hate to be that person, but in all seriousness, the best legal entity will be determined by the nature and vision you have for your startup. Unfortunately, this may require hiring a lawyer, which is not exactly what a new startup wants to hear.

The reason I immediately suggest hiring a lawyer is because there are differences between the two entities which may have varying effects on your company that you may not desire. Foreseeing these potential issues is not the easiest task, and mistakes can be made even with some detailed research. A lawyer who has worked with startups in the past and has business law experience will be able to give you sound guidance that could end up saving you a lot of time and money.

Aside from this point, I can at least give you a brief explanation of each entity and what the implications of each. I will stress that these are extremely brief explanations, so don’t take them as a complete/thorough lesson.

A C-Corporation is a standard corporation while an S-Corporation has a special tax status assigned to it by the IRS. The term “S” corporation comes from its definition in Subchapter S of the Internal Revenue Code. Both types of corporations offer limited liability protection, have similar structures, corporate formalities, and they are both considered separate entities. However, despite their similarities, they have some pretty distinct differences. The biggest difference is how the corporations are each taxed.

C-Corporations are separate taxable entities, and are subject to double taxation. This means that the corporation itself pays taxes, and any dividends paid to the shareholders is treated as personal income and thus subject to additional taxation at the individual level. Conversely, S-Corporations are pass-through entities, and as such are not subject to double taxation. They pay no corporate income tax (although they file form 1120S) and the profit and losses of the business are passed-through onto the stockholders and taxes are paid at the individual level.

See also: Should a tech startup incorporate as an LLC, a C-Corp, or an S-Corp? If so, why?

Another difference between the two is the C-Corporations have no ownership restrictions, whereas S-Corporations do. S-Corporation restrictions include no more than 100 shareholders and they must be U.S. citizens or residents. They can also not be owned by other corporations, LLC’s, or partnerships. Finally, S-Corporations can only have one class of stock while a C-Corporation can have multiple classes.

LLC’s are great if you want that liability protection without all the formality and paperwork. It’s very easy and cheap to set up. There are also some publication requirements in most states. But if you’re looking to raise capital from professional investors this might not be the best structure. More on that here: Why can’t (or won’t) outside investors fund an LLC?

There are a few more differences but these are the primary ones that impact most people. Given the restrictions that come along with an S-Corporation, a C-Corporation offers a little bit more flexibility when starting a business. This especially holds true if you plan on growing the business or raising large amounts of money or want to have preferred shareholders.

Like I said earlier, the best bet is to at least consult with a lawyer to see what your best options are. You should take a look at our site, LawTrades. We are currently helping hundreds of startups find attorneys that can best help them with situations such as this. I have founded two separate startups, and I completely understand how difficult and stressful the beginning stages are. But hiring a lawyer can not only help your company grow and succeed, it also gives you so assurance moving forward that nothing was overlooked.

I hope this answer helps! Please don’t hesitate to reach out if there is anything I can help you with. I am always eager to give a lending hand to a fellow startup company. Best of Luck!