When you're starting a new business, you need to consider what type of entity you're going to form. C corps, LLCs, and S corps differ significantly in the areas of taxation, ownership, fundraising, governance and structure, and employee compensation. Almost all technology startup companies that we work with are C corps. Any company that raises venture financing will need to be a C corp in order to issue preferred stock.
If founders want the benefit of flow-through tax treatme...nt with respect to losses prior to an outside financing, an S corp election may make sense as long as there are no entity or non-U.S. citizen/resident stockholders. However, S corp losses can only be used to offset personal income up to the founders’ basis in the S corp stock, which may decrease the utility of the S corp election. In any event, the S corp election can be easily revoked at the time of a financing. The legal documentation for an S corp is basically identical to an C corp.
We generally avoid LLCs for technology startup companies that need to grant options to employees, and there is not really an easy method to do this. In addition, the conversion of an LLC to a C corp results in additional legal and accounting expense. However, we do like to use LLCs for other types of businesses because of their flexibility.
If you or one of your friends, family members, neighbors, or co-workers is thinking of starting up a new business, give us a call at 253.858.5434 to see how we can be of service. We proudly serve clients throughout Washington and Idaho and are available to meet in person, by phone, or via Skype or FaceTime.