| One of the most important steps in starting up a | | | | stock, and multiple classes of interests. You can have |
| business is the incorporation process. Your corporation | | | | foreign investors. You can have an unlimited number of |
| as an entity receives its legitimacy from the state you | | | | investors. There's almost nothing that an LLC structure |
| incorporate in. The most obvious advantage in forming | | | | won't accommodate. In an LLC, I can do a 90/10 |
| a corporation is that it shields its owners from personal | | | | distribution of dividends, and not be tied to the |
| liability. It guarantees that if something goes wrong in | | | | distribution of ownership. It protects your assets like |
| the business, the owners won't be wiped out | | | | assets like a corporation without the burden of |
| personally. | | | | corporate maintenance. With a LLC, you can elect to |
| There are several options when it comes to | | | | be taxed as a corporation, or avoid "double taxation" |
| incorporating your new business. You will need to | | | | by choosing to be a "pass-through" entity. |
| know your business objectives in order to determine | | | | S-Corporation: |
| which one is right for you. Many entrepreneurs rush | | | | A S-Corp structure is very limiting. There are limitations |
| into this process, incorporate with the least appropriate | | | | on the number of shareholders and on who can be a |
| entity and then regret it later. By reading this guide, you | | | | shareholder. You can only have one class of stock |
| are avoiding this common pitfall. | | | | (there are minor exceptions to that). The S-Corps are |
| One reason people do not incorporate is that in order | | | | very, very inflexible, but they are really cheap to setup. |
| to do so, you must file paperwork with the state. To | | | | With increased flexibility comes complexity. That's why |
| be an S-Corp, LLC, or a Limited Partnership, you have | | | | LLCs are much more expensive to set up. |
| to file papers. What do you have to do to be a | | | | We can map this out very simply. If you know you're |
| General Partnership? Nothing. All you have to do is | | | | not going to have multiple classes of investors, you |
| pursue a business together. That is the default under | | | | should go S-Corp just to save money.For example, if |
| the law. If you just start working together to try and | | | | you have a situation where two brothers or two |
| create something, you are considered general partners, | | | | sisters starting a business, sometimes an S-Corp is the |
| unless you legally change the status of your | | | | best bet; nevertheless, they are really inflexible. |
| business.From a liability standpoint, you are also toast, | | | | Ask a tax person who is used accustomed to figuring |
| because you're liable for everything personally. Your | | | | out the problems with an S-Corp. He or she will tell you |
| personal assets are completely exposed. | | | | that if you think there is any chance that something will |
| Here's the differences between each entity followed | | | | change down the road, you should incorporate as an |
| by a quick reference table: | | | | LLC from the start. It's much harder to fix a problem |
| C-Corporations: | | | | later than it is to plan for different situations in the |
| C-Corps work for that narrow locus of company that | | | | beginning. |
| Venture Capitalists are interested in. They're interested | | | | Doing Business As: |
| in high growth, generating cash, and reinvesting it (not | | | | DBA, or Fictitious business name as it is also |
| distributing it). They're not interested in dividends. They | | | | sometimes called, is another type of organizational |
| want a high growth rate. They want to sell out, either | | | | arrangement. If you are an individual, you want to do |
| through a public offer or through an acquisition | | | | business under your own name, and you don't want to |
| transaction, earning a high price. This is how they get | | | | incorporate, you could use a DBA. Local jurisdictions |
| there: hustle the cash, keep it, grow fast, and use all | | | | have their own requirements of how to start a DBA. It |
| the cash. This is why VCs almost exclusively invest in | | | | doesn't really get you very much in the way of liability |
| C-Corps. You can actually set up a C-Corp and file a | | | | protection, but it can allow your company to do |
| form saying that you want to be taxed as an S-Corp | | | | business as a new name, and open bank accounts |
| (flow-through entity that is taxed once). Later, when | | | | with that name. |
| you are ready to raise money or bring in new | | | | Furthermore, it sometimes happens that a company is |
| investors, you can change your election to be a | | | | incorporated in one state with a certain name. Then |
| C-Corp. It is very hard to do it the other way around. | | | | they go into a different state, and that name is already |
| Limited Liability Company: | | | | taken. They have to do business under a different |
| LLCs are remarkably flexible. You can do almost | | | | name in that state. That is where it is more legitimate |
| anything with them. You can have multiple classes of | | | | to use a DBA. |