Incorporating your business in the early months is essential to protecting your personal assets from any liability of the tech startup. Your choice in which corporate structure you go with will shape the amount of taxes you pay and the paperwork you have to deal with. So it’s a pretty important decision and one that should be carefully considered.
- LLCs are great if you want that liability protection without all the formality and paperwork. It’s very easy and cheap to set up.
- The C-Corp has to file its own tax report and should be selected by startups that are looking to raise VC/Angel money or who plan to reinvest profits back to the company.
- The S-Corp, like the LLC, is a pass-through entity for federal taxes. Basically, that means that the taxable profits or losses for the business are passed through to the business owners, who record these as part of their personal tax filings. Consider this if you think you’ll make a profit right after the incorporation and will distribute it to the shareholders.
Here’s a quick video explanation to that^
Typically, LLC’s are not great for tech startups for a few reasons: (1) VC’s really don’t like pass-through entities; (2) the tax partnership rules are super complicated; (3) it doesn’t allow for stock option plans, convertible notes, etc., (4) it gets more expensive and complicated down the road.
For these reasons, the standard for most high growth technology based startups is incorporating as a C Corporation in Delaware.
But why Delaware? It’s because that state has a very efficient court system that favors businesses and corporate law. There’s also some more administrative ease than some other states and generally just garners a level of credibility with investors and potential partners. More on why startups incorporate in Delaware here.
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