Business structures for startups: deciding on an entity type

When launching a startup or other business, choosing the right business structure from the start is essential. Corporate entity structures can include limited liability companies, corporations, limited partnerships and others. Determining how to register a business has important business implications. The decision can affect the amount of taxes that the entity must pay and the extent of the activities that it can carry on. There are different roles for officers and directors, the dangers of responsibilities and a host of other issues critical to business transactions.

Due to favorable state regulations for corporate governance, most legal entities register in Delaware. We’ll outline some of the main types of business forms that startups can choose from, along with their consequences.

Company structures: Corps C and Corps S

There are two types of corporations: the C Corps and the S Corps. Under Internal Revenue Service (IRS) rules, Company C is the default type of company. C corporations are taxed under Subchapter C of the Internal Revenue Code, while S corporations, which have special tax status, are taxed under Subchapter S of the Internal Revenue Code.

C Corps is generally the preferred corporate structure for raising venture capital funds. This is because there are usually several classes of shares in a venture capital firm or a company funded by angel investors. bank and obtain an employer identification number from the IRS. Companies must have at least one director and two officers (president and secretary). Directors can be officers and vice versa, so you only need two people. structures do not allow.

To start a corporation, you must submit articles of incorporation to the state, draft regulations, and resolutions necessary to open an account with a bank and obtain an employer identification number from the IRS. Companies must have at least one director and two officers (president and secretary). Directors can be officers and vice versa, so you only need two people. structure. Since start-ups typically suffer large losses, a risk of double taxation is unlikely for some time. In addition, once the business becomes profitable, different structures will likely be put in place to distribute the profits.

Double taxation

The main disadvantage of a C Corp structure is the potential for double taxation. C Corps files a corporation tax return on Form 1120. There is also a possibility of personal taxable income if the corporation distributes income to business owners in the form of dividends. Thus, the company pays taxes at two levels: first at the company level and then at the personal level when the company declares dividends.

S corporation structures offer significant tax benefits and are useful if you don’t plan to raise venture capital or angel money. S Corps offers the tax advantages and flexibility of a partnership, namely the avoidance of the risk of double taxation. Partnerships only benefit from one level of taxation. Meanwhile, S Corps also retains the liability protection of a C Corp.

Limited liability company

A Limited Liability Company (LLC) has similar legal characteristics to an S Corp. A key distinction is that LLCs use membership units rather than stock options. This makes it considerably more difficult to effectively allocate equity to employees. LLCs are the best choice for businesses with a limited number of owners. Corporations are best when many people own as shareholders.

Limited partnership

A limited partnership (LP) consists of at least one general partner and one limited partner. Sponsors benefit from limited liability. In other words, the liability of the limited partners is limited to the amount they invest in the business. Sponsors do not get involved in the day-to-day management of the business.

General partners participate in the management of the business, but they have unlimited liability. In other words, within these structures, they are responsible for all the debts of the company, even for amounts exceeding their initial investment. An LP entity benefits from passed-on taxation. They are able to avoid the double taxation typical of C corporations.

Limited liability company

A limited liability company (LLP) is generally reserved for lawyers, architects and accountants. In an LLP structure, some or all of the partners are able to reduce their liability for the actions of other partners. More specifically, the liability of each partner is limited to the amount he invests in the business. If the partnership breaks down, the creditors will not be able to attack the personal property of any of the partners. LLPs enjoy tax advantages similar to those of ordinary partnerships.

Foreign business structures

Company structures vary by country. Many jurisdictions have entity structures with similar characteristics to C corporations, partnerships, and LLCs.

A common legal entity in Germany, Austria, Switzerland and Liechtenstein which has many parallels with the limited liability company (LLC) is the GmbH. The acronym “GmbH” is the abbreviation of the German expression “Gesellschaft mit beschrankter Haftung”, which translates to “limited liability company”.

Another common foreign structure in Germany and neighboring countries is the GA. The abbreviation “AG” is the abbreviation of the German word “Aktiengesellschaft”, which is a publicly traded company. Some familiar examples include Volkswagen AG, Daimler AG, and BMW AG.

Public limited company (PLC) is a type of public company in the UK and some Commonwealth countries. In many French-speaking countries, the Société Anonyme (SA) is a common structure. It is the equivalent of a corporation in the United States and a public limited company in the United Kingdom.

In the United Kingdom, Ireland and Canada, the “Ltd. »The corporate structure protects the personal property of shareholders from liability. This limited liability company structure makes it possible to separate the financial assets of the company from the personal assets of its shareholders. In many French-speaking countries, the S. à rL (Limited Liability Company) is the equivalent of the British Limited Liability Company (Ltd.) or the American Limited Liability Company (LLC).

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About Charles D. Goolsby

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