This is the #1 question most people ask. Here’s the short version: We normally recommend Corporations for companies who expect to look for investors to scale up and go through several rounds of financing; i.e. the traditional startup model. We normally recommend LLC’s for companies who sell more traditional products and expect to grow organically and not seek fundraising to scale.`
LLC’s are simpler and cheaper structures for taxation purposes.
They are known as pass through entities, which means their earnings just pass through to the personal income taxes of their members. This means accountants don’t have to file a separate tax form for the company which also saves on costs.
The downsides of LLC’s are that many investors don’t want to invest in them, because they become Members and will have to pay taxes on the Company earnings. There are also many institutional investors that are prohibited from investing in LLC’s. LLC’s tend to be more suitable for traditional businesses that are looking to sell products and grow organically without taking in investment.
Corporations are better for investors, because investors can passively hold shares without having to worry about tax consequences until they sell them again sometime down the road. This means that most Tech Startups choose to form Corporations!
The downside of corporations are that they are taxed at a higher rate than LLC’s and they require separate filings with the IRS, which means added accountant bills. However, they are the gold standard. 95% of Companies in the United States are Delaware Corporations.
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