Real Estate
LLCs are considered pass-through entities. What this means is that the owners or members of the LLC will pay personal taxes on the income of the company. In other words, the LLC itself, as an entity, is not taxed directly. The owners are. Similar to an LLC, S-Corporations are not taxed directly. The shareholders of an S-Corporation are taxed on the income of the company based on how much of the company they own.
C-Corporations are the only type of entity out of the three basic models that are taxed directly as an entity. The owners, members, or shareholders are only taxed if they are paid in dividends or salary. In this, there is an opportunity for people to be taxed twice; the first time when the firm is taxed, and the second time, when the owner is taxed on the dividends he or she may receive.
LLCs are great for many reasons; they’re easy to start, they have tax flexibility, and they have powerful levels of liability protection.
But if you’re seeking investors, an LLC may not be the best option. Certain types of investors, however, like angel investors may not always be too concerned about your business’s legal structure. This is because an angel investor is often a successful business person who invests in startups before they meet any monochrome of success, as he feels they have a good shot.
Oftentimes, these angel investors will elect to be hands-off in the running of the business. Venture capitalists, on the other hand, are large firms that offer large investments to strong-looking startups. They often want a presence on the board of the startup they invest in and this usually equates to the purchase of shares in the company. If you’re seeking an investment from a venture capitalist, you might want to stay away from the allure of the LLC.
One of the biggest reasons LLCs (and S-Corporations for that matter) are disliked by investors is the tax implications. Like I said earlier, these forms of business entities have pass-through taxation. Any venture capitalist considering a position of ownership of a company would be very uncomfortable with the idea of being personally taxed on any income of the company, without a guarantee that he would be earning a profit.
There are also a variety of circumstances in which investors cannot invest in an LLC or an S-Corporation, even if they wanted to. For example, if a venture capital fund has tax-exempt partners, and so is legally not allowed to invest in a company that has been created as an LLC, as doing so would violate their tax-exempt status (they’re not allowed to receive active business income).
Venture capitalists who manage public funds are also disallowed from investing in an LLC. Further, most venture capital firms are organized as Limited Partnerships, which restricts them from investing in S-Corporations, as S-Corporations are only allowed to take investments from a maximum of 100 individual and natural people.
A further complaint is the possibility of an investor being taxed by a different and additional state. If the startup does active business in multiple states, the investor could be taxed by multiple states as well as federally.
LLCs and S-Corporations are simply full of legal and tax-related complications that make it too difficult and complex for investors to elect to invest. If you are seeking an investment, your best option is to organize as a C-Corporation, despite the possibility of double taxation, as that is something easily avoided. The only time the double tax penalty comes into play is when a C-Corporation pays its net income after expenses tax, then distributions profit in dividends to its shareholders. If the company simply retains the profit, there is no double tax.
Don’t go solely off of my word, though. Get in touch with a business lawyer and explain your full situation. There may well be instances and types of businesses where an LLC would best serve your needs. In other cases, perhaps an S-Corporation.
But in a general sense, starting as a C-Corporation makes the road much simpler to receive investments either in the beginning stages or later on in the game. Beyond that, C-Corporations could potentially be a more comfortable venture to their owners, over an LLC or S-Corporation, because of the pass-through taxation. Some owners might like the pass-through taxes, some might not. Regardless of investors, the taxation you will face should be strongly considered when establishing yourself as a legal business entity.
Startups Looking to Raise Investor Funds
When starting your company, one of the most consequential decisions you can make is how you will organize as a legal entity. Here, I am referring to the three basic forms; Sole Proprietorship, Limited Liability Companies (LLCs), and Corporations. Each type of entity has various similar characteristics, the place where they all differ involves taxation.LLCs are considered pass-through entities. What this means is that the owners or members of the LLC will pay personal taxes on the income of the company. In other words, the LLC itself, as an entity, is not taxed directly. The owners are. Similar to an LLC, S-Corporations are not taxed directly. The shareholders of an S-Corporation are taxed on the income of the company based on how much of the company they own.
C-Corporations are the only type of entity out of the three basic models that are taxed directly as an entity. The owners, members, or shareholders are only taxed if they are paid in dividends or salary. In this, there is an opportunity for people to be taxed twice; the first time when the firm is taxed, and the second time, when the owner is taxed on the dividends he or she may receive.
LLCs are great for many reasons; they’re easy to start, they have tax flexibility, and they have powerful levels of liability protection.
But if you’re seeking investors, an LLC may not be the best option. Certain types of investors, however, like angel investors may not always be too concerned about your business’s legal structure. This is because an angel investor is often a successful business person who invests in startups before they meet any monochrome of success, as he feels they have a good shot.
Oftentimes, these angel investors will elect to be hands-off in the running of the business. Venture capitalists, on the other hand, are large firms that offer large investments to strong-looking startups. They often want a presence on the board of the startup they invest in and this usually equates to the purchase of shares in the company. If you’re seeking an investment from a venture capitalist, you might want to stay away from the allure of the LLC.
One of the biggest reasons LLCs (and S-Corporations for that matter) are disliked by investors is the tax implications. Like I said earlier, these forms of business entities have pass-through taxation. Any venture capitalist considering a position of ownership of a company would be very uncomfortable with the idea of being personally taxed on any income of the company, without a guarantee that he would be earning a profit.
There are also a variety of circumstances in which investors cannot invest in an LLC or an S-Corporation, even if they wanted to. For example, if a venture capital fund has tax-exempt partners, and so is legally not allowed to invest in a company that has been created as an LLC, as doing so would violate their tax-exempt status (they’re not allowed to receive active business income).
Venture capitalists who manage public funds are also disallowed from investing in an LLC. Further, most venture capital firms are organized as Limited Partnerships, which restricts them from investing in S-Corporations, as S-Corporations are only allowed to take investments from a maximum of 100 individual and natural people.
A further complaint is the possibility of an investor being taxed by a different and additional state. If the startup does active business in multiple states, the investor could be taxed by multiple states as well as federally.
LLCs and S-Corporations are simply full of legal and tax-related complications that make it too difficult and complex for investors to elect to invest. If you are seeking an investment, your best option is to organize as a C-Corporation, despite the possibility of double taxation, as that is something easily avoided. The only time the double tax penalty comes into play is when a C-Corporation pays its net income after expenses tax, then distributions profit in dividends to its shareholders. If the company simply retains the profit, there is no double tax.
Don’t go solely off of my word, though. Get in touch with a business lawyer and explain your full situation. There may well be instances and types of businesses where an LLC would best serve your needs. In other cases, perhaps an S-Corporation.
But in a general sense, starting as a C-Corporation makes the road much simpler to receive investments either in the beginning stages or later on in the game. Beyond that, C-Corporations could potentially be a more comfortable venture to their owners, over an LLC or S-Corporation, because of the pass-through taxation. Some owners might like the pass-through taxes, some might not. Regardless of investors, the taxation you will face should be strongly considered when establishing yourself as a legal business entity.
Your comment