Do More Faster: TechStars Lessons to Accelerate Your Startup

Chapter 66. Choose the Right Company Structure

Brad Feld

Brad is a managing director at Foundry Group and one of the co-founders of TechStars.

When you start your company, you need to choose the type of corporate form you want. There are two logical choices (S-Corp or C-Corp), and a third one (LLC) that pops up occasionally. The best choice depends on the financing path you are ultimately planning on going down.

• S-Corp: If you are not going to raise any VC or angel money, an S-Corp is the best structure because it has all the tax benefits and flexibility of a partnership—specifically, a single tax structure versus the potential for double tax structure of a C-Corp—while retaining the liability protection of a C-Corp.

• C-Corp: If you are going to raise VC or angel money, a C-Corp is the best (and often required) structure. In a VC or angel-backed company, you'll almost always end up with multiple classes of stock, which are not permitted in an S-Corp. Since a VC or angel-backed company is expected to lose money for a while (that's why you are taking the investment in the first place!) the double-taxation issues will be deferred for a while, plus it's unlikely you'll be distributing money out of a VC or angel-backed company when you become profitable.

• LLC: An LLC (limited liability corporation) will often substitute for an S-Corp (it has similar dynamics), although it's much harder to effectively ...