Company TBD

One of the major early decisions founders have to make is selecting the right incorporation structure.  As I found out pretty quickly, this is not a simple decision.  While there are only 3 choices (C-Corp, S-Corp and LLC), the number of exception cases and ‘If/thens’ were making my head spin so I decided to simplify the decision.  A picture is worth 1000 words so here goes:

C-corp, S-corp or LLC

Caveat:  This is obviously a simplification and cannot possibly accommodate all of the various scenarios out there.  Thus, this is informational only (I am not a lawyer) and you should consult your accountant and/or attorney to discuss what is best for you.

The advantages of simplifying are so startups can focus on a few important questions to make this decision.  Turns out most of the questions revolve around financing and operating flexibility.

• Are you raising VC or Angel financing? If you’ve already decided that you’ll need equity financing from professional investors then your best bet is to go with a C-Corp.  This gives you the most ownership flexibility (no limit on shareholders, multiple classes of shares, etc).  From what I gather, most VCs will insist on this structure
• Not sure and want to keep all of your options open? The S-Corp allows you to minimize taxes and easily convert to a C-Corp in the future if you do end up raising money.  Think carefully about whether you want to raise money as there are a whole set of other implications (that’s material for another post though).  Note; the vast majority of startups are actually bootstrapped or funded by friends/family.
• Do you want to bootstrap or build a lifestyle business with minimal operating formality? Then an LLC is probably the best structure as it allows you to minimize your tax burden and has no formal operating requirements such as quarterly board meetings and filing annual reports.  However, if you change your mind and want to raise money than it will be more difficult and expensive (relative to a S-corp), but not impossible to convert to a C-Corp.

There are a ton of great resources out on the web on this topic.  Here are the ones I found useful:

• Post by Startup Company Lawyer.  Good overview of the different entities comparing taxation, ownership and other criteria
• Simple overview spreadsheet by Legalzoom
• NextNY discussion on S-corp vs C-corp
• How to choose right legal structure – article by Inc magazine

Hope this helps clarify the decision for some of you.  You are taking enough business risk with your startup, there is no need to add additional risk/complexity by choosing the wrong incorporation structure.

I would love to hear how other founders made this decision and any feedback on the above.  Now back to actually building a business.