| Starting a new legal entity in the United States is relatively easy, but it’s an important decision. The type of company you register will impact your startup’s management structure, shareholder rights and tax obligations. If you intend to take investment from venture capitalists or sell abroad sometimes specific entities are required. |
| The Law There are four main types of entities to consider in the United States:
State Law S Corporation Limited Liability Corporation (C or S Corporation) Limited Liability Corporation (Sole Proprietorship or Partnership) State Law C Corporation If you are aiming to raise venture capital, you will most likely need a Deleware C Corporation. This used to be a strict requirement but recently some venture capitals have become more lenient as they start to invest in smaller or foreign markets due to the competition in the investing space. This trend may reverse in the current market. As a founder of a C Corporation, your business will need to pay corporate tax, and when you sell your shares or collect a salary, you will be subject to personal income and capital gains taxes. This structure is preferred by VCs because it provides lots of flexibility in share rights and share structure, meaning that they can add any conditions or clauses that they want when making their investment. State Law S Corporation S Corporations are similar to C Corporations but with limitations. The key limitations are: the corporation cannot have more than 100 shareholders the corporation can only issue one class of stock the shareholders must be US entities or individuals Limited Liability Corporation (C or S Corporation) These companies are easier to form than State C Corporations or S Corporations but can elect to be taxed similarly to either type of corporation. The limitation of a Limited Liability Corporation is that they don’t have the same flexibility as C Corporation regarding share structures and rights, making them less enticing to venture capitalists. Limited Liability Corporation (Sole Proprietorship or Partnership) If you are looking to raise capital straight away, this type of business is easy to set up, and all the income is treated like a salary, so it’s all very easy to set up and use. The problem comes when the company tries to grow, as there can be tax burdens and issues for investors who may not want those burdens and would have been shielded if the company was taxed like a C Corporation or S Corporation. What You Should Do In addition to those factors above, there are other procedural considerations like the requirements for Annual Reports, Franchise Taxes, Annual Meetings, Board of Directors etc. The best option depends on your plan for your business; there isn’t a perfect correct answer for the type of company formation you should choose. |