Disclaimer: This post discusses general legal issues, but it does not constitute legal advice in any respect. This post is not a substitute for legal advice and is intended to generate discussion of various issues. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel. Cara Stone, LLP and the author expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this post. The views expressed herein are personal opinion.

LLCs

In general, when a company’s goal is to raise venture and angel capital they should chose to form as a corporation. The question follows, when should a company be an LLC?

There are several instances when an LLC may be a better option than other entity forms. In general, professional services companies or limited partnerships may benefit from the LLC tax structure over the corporate tax structure. Professional services companies can include design firms, architecture firms, law firms, restaurants, or other services businesses.

The LLC structure is preferred for these companies because they are generally planning to take income in as a company and then distributed quickly to the owners. Corporations on the other hand, are typically beneficial when a company is focused on minimizing expenses and maximizing their value at exit. Services companies are typically more focused on making distributions which makes them better candidates for LLCs.

In addition, private equity firms, funds, or other types of investment vehicles will likely be good candidates for an LLC or limited partnership structure.  Similarly, sole proprietors looking to help shield themselves from some personal liability may want to look at an LLC or S corporation structure.

When Not to Choose An LLC?

If you are a startup or company whose primary goal is to raise money and exit, most of the time, it is best to start as a corporation. Companies may get advice to form as an LLC because it is less expensive, however, investors overwhelmingly prefer corporations to LLCs.

Check out our articles on Why Corporations Are Preferred For Startups and What You Need To Know About Reorganizations to learn more.

 

 

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