"Legal Stuff Explained" is a series of workshops, taught by local lawyers to the entrepreneurial community of New York.
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Catching Elephant is a theme by Andy Taylor
“CHOOSING THE RIGHT BUSINESS STRUCTURE”
Check out the video snippet and the takeaways below from Ilya and Tudor for a recap of last weeks class on business entities.
Also don’t miss signing up for this Thursday’s class, Backed! Equity financing techniques and regulations
1. Where should you incorporate?
Because of its heavily pro-business commercial code and well developed commercial case law, Delaware is one of the best States to choose for incorporation.
2. What type of business entity should you choose?
Generally:
C-Corp: If you anticipate needing/seeking outside funding from a group of investors
- This is the best option if you plan on seeking outside investment from Venture Capital and/or Angel groups in the early stages, expect your company to grow into a large corporation that will one day IPO.
S-Corp or LLC: If you don’t anticipate needing or expect to raise a lot of outside funding
- This might be a good option for Small companies you don’t expect to become very large and are planning to fund yourself or via friends and family.
3. Important points to keep in mind:
Sole Proprietorships & Partnerships do not have limited liability protection for the founders/owners – All other business entities (S, C, LLC) liability for the operations of the business is limited to the assets of the company (founders/owners are generally not personally liable)
S-Corps and LLC’s are single tax entities – profits and losses pass through to the shareholders. C-Corps are double tax entities – profits and losses are retained by the business.
C-Corps have 2 classes of stock (common and preferred) and can have an unlimited number of Shareholders. S-Corps operate like C-Corps except that they only have 1 class of stock (common) and they are limited to a max of 100 investors.
LLC’s are composed of members (not stockholders) and the members rights are flexible (not limited to 2 classes)
You can elect S-Corp status or an LLC and later change to a C-Corp as the business grows – BUT this does involve some additional legal actions, and fees.
Check out this clip from our sold-out class on equity compensation! Zeke explains the tax treatment of stock grants, and answers questions about 83(b) elections.
Here are the takeaways from the class:
- Equity compensation is a useful way to incentivize partners and employees.
- Granting equity and similar rights has important tax and legal consequences.
- Designing an effective compensation structure requires balancing business, tax, and legal aspects.
Also, thanks to Zeke’s generosity, here are the slides!
