The choice for which corporate structure is best for your startup depends on a bunch of factors. Below are some guidelines to help you think through the process on your own:
- Do you plan on bringing in outside investors to grow your business? If yes, an Inc. (or C-Corp) instead of an LLC might be a better entity form because it allows for stock option plans, convertible notes, and generally the expected structure for most investors. You may run into a Double taxation issue, but if you need investors to fund your business, you really should be a C-Corp.
- The second question is budget: How much can you spend? An LLC is pretty cheap and easy to set up. One of the great benefits of this structure is it offers similar liability protection minus all the formality and paper that typically comes with a C-Corp.
- The third question you should ask yourself is what tax rates should I expect to pay and what are the tax advantages with each entity? With a C-Corp, you will most likely pay federal taxes on income and taxes on distributions to the shareholders. LLC’s on the other hand, are usually taxed at the state level and at a different rate from C-Corps. It’s best to consult with a legal/tax professional about the nuances.
There is no exact science to picking any one entity from the other. For many startups, the ability to look attractive to investors may outweigh other considerations like time/money. The best way to help make this decision is to confer with a legal professional who really understands your business and find a solution that works for your startup. To help you decide, you may want to check out. We’re a legal platform for entrepreneurs. We offer no obligation price quotes & free 20 minute consultations. Good luck w/ the venture.