Do More Faster India, 2nd Edition

Chapter 69Choose the Right Company Structure

Brad Feld

Brad is a partner at Foundry Group and one of the cofounders 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 and how you want to deal with taxes.

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 harder to effectively grant equity (membership units in the case of an LLC versus options ...