Legal Entity

Legal Entity

July 31, 2020 by investor

Hello, this is Hall T. Martin with the Startup Funding Espresso — your daily shot of startup funding and investing.

In launching your startup you must have a legal entity to raise funding.

Start with an LLC or Limited Liability Company. This can be filed with your Secretary of State at your state government. 

The cost is low and it will serve well for the early days of the business.  

For family and friends funding this is sufficient.

In the early days, you can use an S-Corp designation with an LLC to defer taxes to your personal filing.

As you move to raise funding from angel investors and venture capital, some will want to invest in a Delaware Corp.  

It’s easy to move from an LLC to a C-Corporation. It’s more difficult to move from a C-Corp. back to an LLC. 

In most cases, investors will ask for a Delaware Corporation as it’s the gold standard for legal entities in the U.S. as it provides the best protection for investors.

Most venture capital funds have set up their investment documents to invest in a Delaware Corporation entity and they are not going to change it for your business.

When you are ready to raise funding beyond family and friends, make clear to investors you will convert to a Delaware Corporation.

Entity conversion does come at a cost, so make the conversion contingent on fund closing.

Thank you for joining us for the Startup Funding Espresso where we help startups and investors connect for funding.

Let’s go startup something today.
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Hall T Martin is the director of Investor Connect, which is a 501(c)(3) nonprofit dedicated to the education of investors for early-stage funding. All opinions expressed by Hall and podcast guests are solely their own opinions and do not reflect the opinion of Investor Connect. This podcast is for informational purposes only and should not be relied upon for the basis of investment decisions.