A tech startup can incorporate in many different forms, but an LLC, C-Corp, or S-Corp are most common. Each form has its pros and cons and your choice can therefore help or hurt you as your company grows. For this reason, it is important to understand and weigh these pros and cons and determine which form is best for your company.
C-Corp – A C-Corporation is the “standard” corporate form and the one that most investors prefer. It offers liability protection and allows the company flexibility to determine how to distribute its earnings. But, there is a “double-taxation” problem, a tax is paid first by the corporation on its earnings and then also by shareholders on their individual tax returns.
LLC – A Limited Liability Corporation is a sort of more informal version of a corporation. The tax reporting and management structures are more flexible, but it still offers liability protection for the owners. However, you will find some outside investors are less willing or even unable to invest in an LLC.
S-Corp – the S-Corp form can either be set up as a corporation or an LLC. Like an LLC, it is used to avoid double taxation. Here, no tax is paid at the corporate level. Instead, the business losses and profits are “passed-through” to shareholders and taxes are paid on the individual shareholders’ tax returns. A corporation taking on the S-Corp form is also subject to certain limitations and rules concerning its shareholders, including barring owners who are not citizens of the US.
For a tech company looking to grow from outside investment, the generally preferred structure is the C-Corp because of the facilitation of outside investment. This is especially true for foreign cofounders. That said, it is very important to understand what your company is trying to do and which form of incorporation will help you do that.
To find out more about which form is best for your company, you should speak to an attorney. We’ve helped a ton of companies incorporate at. Our marketplace makes the legal experience easy and affordable by using technology to connect entrepreneurs w/ quality startup attorneys across the country. We offer free initial consultations, a satisfaction guarantee, and start-to-finish customer support. Good luck!