{"id":2339,"date":"2019-05-06T11:39:42","date_gmt":"2019-05-06T15:39:42","guid":{"rendered":"https:\/\/scholarblogs.emory.edu\/techtransfer\/?p=2339"},"modified":"2023-09-27T13:02:39","modified_gmt":"2023-09-27T17:02:39","slug":"corporate-structures-for-the-newbie","status":"publish","type":"post","link":"https:\/\/scholarblogs.emory.edu\/techtransfer\/2019\/05\/corporate-structures-for-the-newbie\/","title":{"rendered":"Corporate Structures for the Newbie"},"content":{"rendered":"

Choosing a corporate structure isn\u2019t just an exercise in paperwork \u2013 it determines the company\u2019s tax status, as well as its relationship to potential investors and managers. In this regard, it is one of several key decisions to be made in the early life of your startup. Generally speaking, there are four primary considerations that can guide this decision-making process. These are a) tax requirements, b) access to outside funding, c) level of legal protection, and d) administrative obligations. Below is an outline for a handful of common corporate structures relevant to university-based startups focusing on these elements.<\/p>\n

C Corporations<\/strong>
\nRegistering as a C Corp renders the company as an independent entity with its own set of finances and procedures. This offers the strongest protection against personal liability for any of the corporation\u2019s losses, or more importantly, debts, as a C Corp is distinct from its owner-members by design (and a C Corp can have any number of owners). There are, however, administrative requirements that can be complex and expensive, both monetarily and in time-cost. Registering a C Corp often requires a filing fee. There are a number of benefits to registering as a C Corp, however. In addition to allotting common stock to shareholders, C Corps can issue preferred stock that comes with additional terms and benefits. These are usually a key component of financing deals with venture capital firms and angel investors, who want tailored assurances and returns on their investments. C Corps are also designed to facilitate the transfer of stock. However, C Corps are typically seen as being subject to double taxation \u2013 as a partial owner, individuals have to pay income tax on any dividends issued and the company itself is subject to various corporate taxes. C Corps are generally eligible for more tax deductions than other business structures.<\/p>\n

S Corporations<\/strong>
\nS Corps are highly similar to C Corps but generally viewed as having a less burdensome tax structure. Any profits or losses recorded by an S Corp \u201cpass through\u201d into the owners\u2019 personal tax returns, avoiding the double taxation quandary. This structure has implications for self-employment taxes. An S Corp, however, lacks many of the provisions that make C Corps so attractive to investors. For one, S Corps are capped at 100 shareholders and business owners must either be U.S. Citizens or residents, eliminating the involvement of foreign investors or other business entities. S Corps also only issue common stock instead of preferred stock as discussed.<\/p>\n

Limited Liability Companies (LLCs)<\/strong>
\nLimited liability companies, commonly known as LLCs, differ from traditional corporate structures in that they provide liability protections to their owners while offering more tax and management flexibility. This means owners can protect their personal finances without needing to submit to the same requirements of a traditional corporate structure. Furthermore, owners can elect to have an LLC treated as a corporate entity, like C Corps are, or as a \u201cpass through\u201d entity, akin to how S Corps are, as it relates to taxes. LLCs are often viewed as a blend between a C Corp and more informal corporate structures and their requirements are meant to be adaptable to the needs of each business. LLCs are usually less preferred for outside investment though as their ownership is dictated by membership interests, which are ownership percentages that allow for a share in profit\/decision-making, rather than stock allotment.<\/p>\n\n\n\n\n\n\n\n\n\n\n\n\n\n
\u00a0<\/strong><\/td>\n\n

C Corp<\/strong><\/p>\n<\/td>\n

\n

S Corp<\/strong><\/p>\n<\/td>\n

\n

LLC<\/strong><\/p>\n<\/td>\n<\/tr>\n

Continuity of life (company duration is not contingent upon original owners)<\/td>\nYes<\/td>\nYes<\/td>\nYes, unless otherwise specified in Certificate of Formation<\/td>\n<\/tr>\n
May award stock to attract investors<\/td>\nYes<\/td>\nYes<\/td>\nNo<\/td>\n<\/tr>\n
May award membership units to attract investors<\/td>\nNo<\/td>\nNo<\/td>\nYes<\/td>\n<\/tr>\n
Owner liability<\/td>\nShareholders have limited liability<\/td>\nShareholders have limited liability<\/td>\nMembers have limited liability<\/td>\n<\/tr>\n
Upper bound on number of owners<\/td>\nNo<\/td>\nYes<\/td>\nNo<\/td>\n<\/tr>\n
Owners must be U.S. citizens or residents<\/td>\nNo<\/td>\nYes<\/td>\nNo<\/td>\n<\/tr>\n
Other businesses may assume partial to full ownership<\/td>\nYes<\/td>\nNo<\/td>\nYes<\/td>\n<\/tr>\n
Owners can list business profit\/loss on personal tax returns<\/td>\nNo<\/td>\nYes<\/td>\nContingent upon elected tax status<\/td>\n<\/tr>\n
Annual board meeting requirements (with compulsory meeting minutes)<\/td>\nYes<\/td>\nYes<\/td>\nNo<\/td>\n<\/tr>\n
Annual report requirements<\/td>\nYes<\/td>\nYes<\/td>\nYes<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

 <\/p>\n

References<\/strong><\/p>\n