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The Best Corporate Structure For An Early Stage Company

Date: 02/04/2006 | Category: Business | Author: John Vanhara

 Wondering what is the best corporate structure. It all depends on circumstances and your goal. Here is an opinion of venture capitalist, Brad Feld, managing director of Mobius Venture Capital:

“There are two logical choices (S-Corp or C-Corp) and a third one (LLC) that pops up occasionally.  The best choice depends on the financing path you are ultimately planning on going down.  Rather than define each of them in-depth, I’ve linked to the Wikipedia definitions which are very good.

S-Corp: If you are not going to raise any VC or angel money, an S-Corp is the best structure as it has all the tax benefits / flexibility of a partnership – specifically a single tax structure vs. the potential for double tax structure of a C-Corp – while retaining the liability protection of a C-Corp.

C-Corp: If you are going to raise VC or angel money, a C-Corp is the best (and often required) structure.  In a VC / angel backed company, you’ll almost always end up with multiple classes of stock, which are not permitted in an S-Corp.  Since a VC / angel backed company is expected to lose money for a while (that’s why you are taking the investment in the first place!) the double taxation issues will be deferred for a while, plus it’s unlikely you’ll be distributing money out of a VC / angel backed company when you become profitable.

LLC: Often an LLC (Limited Liability Company) will substitute for an S-Corp (it has similar dynamics) although it’s much harder to effectively grant equity (membership units in the case of an LLC vs. options in an S-Corp or C-Corp – most employees understand and have had experience with options but many don’t understand membership units.)  LLC’s work really well for companies with a limited number of owners; not so well when the ownership starts to be spread among multiple people.”

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