Prior to looking for venture capital, most experts agree that you should properly incorporate your business. You do not necessarily need to incorporate in the state where the business will be based. In fact, many corporations chose to domicile their entities in states that have favorable business laws. It is very popular among startup businesses seeking investment to register in the State of Delaware or the State of Nevada. These states have very favorable laws in regards to the operations of businesses, business disputes, and business confidentiality laws.
There are number of different entities that you can chose from which to run your business operations. The most popular structures are:
C-Corporations
Limited Liability Companies (LLCs)
S-Corporations
Limited Partnerships (LPs)
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The first three listed are the most popular form of incorporation among businesses. Limited partnerships are typically used by large scale venture capital firms or companies that are seeking to establish subsidiaries (but with a different ownership structure). C-Corporations and S-Corporations are formally incorporated businesses that are often referred to as “Business Name, Inc.”. These are regular stock corporations.
The difference between a C-Corporation and an S-Corporation in the manner in which they are taxed. A C-Corporation pays taxes much like an ordinary citizen. The shareholders of the company are then re-taxed on any dividend distributions made by the business. S-Corporations are not taxed at the corporate level. The profits of S-Corporations flow to the respective individual owners’ income tax statement. However, only natural persons can be owners of S-Corporations (with very limited exceptions). As such, they are typically not the entity of choice used when looking for venture capital. It would most likely be more appropriate to incorporate as a C-Corporation when dealing with a third party funding source.
The limited liability company is becoming a very popular vehicle to conduct business operations as it provides substantial flexibility regarding ownership, management, and distribution of profits. This is quickly becoming the entity of choice among startup businesses.
As always, it is imperative that you speak to both a certified public accountant and a licensed tax attorney to determine the most appropriate entity for your business – especially if you are seeking to raise capital.
Looking For Venture Capital is a specially designed website for entrepreneurs that are seeking to raise capital for their startups, small businesses, and expanding existing businesses. The focus of the site is on Venture Capital.
