Generally angel investors and VC’s prefer investing in C-Corps.
And what about LLC’s?
LLCs are much less formal and more flexible business-structure-wise than C-Corps, avoid a “double-tax” (just taxed once on a personal income tax level), and protect entrepreneurs from personal liability. BUT, for accounting/tax purposes LLC’s are taxed as partnerships (making the operating very long and complex); LLCs are tough/expensive to convert to C-Corps and angel and VC’s rarely deal with them; the capital structure isn’t flexible like it is in a C-Corp.
The Advantages of a C Corp
- Shields entrepreneurs from personal liability
- VCs don’t generally invest in “pass-through entities” such as LLCs or S-Corps for tax purposes
- Cheaper to set up than an LLC in states that require publication fees for LLC’s.
- Flexible stock structure/easy to issue different classes of stock, also easy for investors to use different financial documents (like convertible notes, SAFES, warrants, subordinated debt)
- Best structure to raise equity capital through crowdfunding sites like Kickstarter
- Maximize medical coverage tax deductions
- Easier to get foreign investors (S corporations, by definition, cannot have any nonresident alien shareholders.)
- Minimize employment taxes.- shareholder-employees of S and C corporations pay FICA (Social Security and Medicare) taxes only on wages they receive.
The Disadvantages of a C corp
- Can potentially be expensive (if the corporation is doing business in a state different from the state of incorporation)
- A lot of corporate formalities/record keeping requirements, compared to an LLC, which is contract based.
- Double-taxation (corporate and personal income tax), since a C-Corp isn’t a “pass-through entity”, like an LLC or a S-Corp.
Hope that helps! Feel free to reach out if you have any questions and feel free to stop byto make that switch from LLC to C-Corp.