Hello, this is Hall T. Martin with the Startup Funding Espresso — your daily shot of startup funding and investing.
For a startup to raise funding it must have a legal structure.
The two choices are LLCs, which is a Limited Liability Company, or a C-corp.
Most startups launch with an LLC and convert to a C-corp later due to the cost.
It’s very easy to move from an LLC to a C-corp, but it’s very hard to go back the other way.
C-corps are taxed at the corporate level, while LLCs are a pass-through structure allowing losses and profits to flow to the members.
A Delaware C-corps is the venture capital standard. Most VCs have their terms sheets set up for Delaware C-corps and they won’t be changing it.
To accept their funding you must have a Delaware C-corp entity.
If you have a C-corp, your ownership will be stated in shares. If you have an LLC, your ownership will be stated in units.
Upon exit, LLCs can be preferable to the owners as you can build up losses from the early days to reduce the tax burden upon selling the business.
LLCs cannot take advantage of tax laws such as 1202, 1045, or 1244 which provide tax incentives to startups but only if it’s in a C-corp structure.
Setting up boards and providing stock options are more difficult for LLCs than C-corps.
Start with an LLC and convert to a C-corp when you raise institutional funding.
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.