Startups often ask us how a typical startup is structured. While there are plenty of free and affordable resources for various forms, they don’t provide much guidance on what forms to use and why. In fact, there is no one-size-fits-all approach to structuring a startup. Each is unique in its needs. Still, there are some default positions that apply to the typical startup structure for a technology (or other) startup seeking venture capital. Read more
S-Corporations are not technically a distinct entity type. Rather, the term “S-Corp” refers to a type of tax treatment available to corporations and LLCs that meet certain requirements. When a corporation makes an S-Corp election, it will avoid double taxation, which is often viewed as the primary disadvantage of creating a corporation (i.e. a C-Corp). Instead, the corporation will enjoy pass-through taxation. In the context of LLCs, the choice to be taxed as an S-Corp can allow the owners to lower their tax liability in certain situations. To elect to be taxed as an S-Corp, a company must meet strict requirements. These requirements, as well as a brief overview of how an S-Corp election impacts the 4 factors to consider when choosing a business entity, are described below. Read more
The C-Corporation is the default corporate form, meaning when you incorporate your enterprise as a corporation, you are automatically classified as a C-Corp in the state where you incorporate. The C-Corp is generally considered the preferred entity type for businesses that seek funding from sources such as angel investors and venture capitalists. But the tax treatment of C-Corps is often considered the main disadvantage of forming a C-Corp. Additionally, there are significant formalities that must be followed for C-Corps. Below is a description of the C-Corp form in terms of the 4 factors to consider when choosing a business entity. We encourage you to read this article if you are deciding whether you should incorporate your business in Delaware or California. Read more
The limited liability company, or LLC, is a relatively recent addition to the menu of options available when choosing a legal entity. It is a hybrid between a partnership and a corporation, designed to combine the benefits of both. In short, an LLC enjoys the taxation and governance advantages of partnerships while also providing limited liability to the owners similar to a corporation. Below is a description of how an LLC fares in the 4 factors to consider when choosing a business entity. Read more
A limited partnership is a business entity that is characterized by two distinct types of owners – general partners and limited partners. General partners are the active managers of the business and (as in general partnerships) are personally liable for the obligations of the partnership, while limited partners (usually investors) act as passive owners who enjoy limited liability. In California, a limited partnership is created by filing a Certificate of Limited Partnership (Form LP-1) with the Secretary of State.
A general partnership is created when two or more people engage in business as co-owners for a profit. A general partnership is created automatically as a matter of law without filing any paperwork with the State, however, in California the partners may choose to file a Statement of Partnership Authority (Form GP-1) with the Secretary of State.
When deciding what business entity type to use for your social enterprise, you should start by considering the factors that all businesses should consider at the formation stage. Once you have decided on an entity type, you should consider where to incorporate your social enterprise. If you plan to establish a flexible purpose corporation, then California is your only choice. But if you set your sights on creating a benefit corporation, then you can choose from a number of states. Read more
The laws and requirements governing business entities are made primarily at the state level. Thus, each state may impose different requirements on businesses incorporated in that state. So why do businesses incorporate in Delaware vs. California and should you incorporate your social enterprise in Delaware or California? Read more
A sole proprietorship is the most basic business entity type. By definition, a sole proprietorship consists of only one owner who does business without any formal incorporation. If you add a second owner, then the business automatically becomes a general partnership. A sole proprietorship is legally indistinguishable from the individual. Read more
We are often asked “what is the best entity type?” There really is no one-size-fits-all answer because each entity may be more or less beneficial for any given enterprise. Rather, it is important for entrepreneurs to consider various factors when choosing a business entity. Read more