I gotta go w/ the consensus – create a C-Corp before the investment. An LLC (or S-Corp) is not going to work for VCs and, an increasing number of, angel investors for legal reasons.
An LLC is a much less formal and more flexible business structure than C-Corps. Yes, an LLC also avoids a “double-tax” (just taxed once on a personal income tax level), and protects entrepreneurs from personal liability. However, for tax purposes, LLCs are taxed as partnerships, which VCs hate. LLCs are also tough and expensive to convert to C-Corps because the capital structure in an LLC isn’t flexible like it is in a C-Corp, causing angel and VCs to rarely deal with them.
- A C-Corp, on the other hand, is the most attractive business entity to angels and VCs. Here’s why:
- As every corporation does, it shields entrepreneurs (and investors) from personal liability
- It’s cheaper to set up than an LLC in states that require publication fees for LLC’s
- There is a flexible stock structure, making it easy to issue different classes of stock, and for for investors to use different financial documents (like convertible notes, SAFES, warrants, subordinated debt)It’s the best structure to raise equity capital through crowdfunding sites like Kickstarter
- It allows you to maximize medical coverage tax deduction and minimize employment taxes as shareholder-employees of C-Corps pay FICA (Social Security and Medicare) taxes only on wages they receive
- It’s attractive to foreign investors (S-corporations, for example, cannot have any non-resident shareholders). It’s relatively easy for an investor to exit a C-Corp, which is important considering many investors have their end-game in their mind before they even agree to invest
- Dividends the C-Corp earns from other corporations are largely non-taxable
You should visit our sitefor additional guidance on structuring your startup. As you grow your company you might run into issues concerning employee contracts, protecting intellectual property, raising venture capital and more – legal issues that a lawyer can help you prepare for from day one. Feel free to also PM with any questions you have about how and where to form your company, and any related issues. Best of luck!