A Publication of WTVP

There are many issues an entrepreneur should consider when deciding on the choice of entity.

One of the most important decisions an entrepreneur can make regarding their startup business is deciding the entity for their venture, as this will impact all future decisions. Each business endeavor is unique, and the keys to its success depend on the needs of the venture.

There are many issues an entrepreneur should consider when deciding on the choice of entity. For example, is my business in a high-risk market such as real estate, where I need to personally shield myself and others from liability? Or will my business be in a market where there is less risk, such as consulting? Since every business has different issues to consider, the pros and cons of each entity should be weighed against the needs of the business to help facilitate long-term growth and success.

Initially, an entrepreneur is focused on his or her startup business, and the choice of entity is a lower priority. However, the entity he or she selects can have a profound impact on future success. The following entities are generally the best options for startups.

C Corporation
Corporations are separate legal entities created under state laws. Thus, a corporation has a separate legal existence from its owners.

The pros:

The cons:

A C corporation is a good option for startup businesses. The corporate structure allows the business to raise additional funds, issue stock or other securities, and provide liability protection.

S Corporation
The formation and maintenance of an S corporation is similar to the C corporation. However, the shareholders must make a special federal income tax election to be an S corporation and meet certain technical requirements, including the following:

The S corporation does not pay tax, but the income is passed through to the individual shareholders. It is extremely important for the shareholders in an S corporation to have a shareholder's agreement to prevent the S corporation status from terminating.

The pros:

The cons:

The S corporation is ideal for any business which would like to shield the owners from personal liability and is looking to take advantage of anticipated losses. Many startups and entrepreneurs should consider an S corporation as an entity. While the S corporation may not initially be attractive to VC investments, transitioning from an S corp to a C corp is not difficult.

Limited Liability Company
LLCs are generally described as a hybrid between a corporation and a general partnership. The LLC is a business entity which allows investors to combine many of the tax and management features of the partnership with the limited liability protection of the corporation. The LLC also eliminates the frustration many new businesses have experienced trying to comply with the S corporation ownership requirements in order to take advantage of limited liability.

The pros:

The cons:

Startups should consider carefully the choice of entity for their business. There are several factors that should be considered in making the choice and the entrepreneur should seek sound legal, accounting and tax advice when making the decision. iBi