Choosing the Right Entity for Your Startup: Corporations
Updated: Jun 11, 2020
Choosing the right entity is one of the first decisions entrepreneurs need to make when embarking on a new venture. There are a hand full of options out there, but the most common types of entities in Oregon today are limited liability companies (LLC) and corporations (Corp), each bringing their own corporate and tax advantages to the table. In this article, we’ll focus on C Corporations, discussing the advantages and disadvantages to this type of entity, and next week’s articles will delve in to S Corporations and LLCs.
Corporations are the “traditional” entity choice for the business world, and offer a somewhat inflexible management structure. This, of course, means more work in terms of paperwork and record keeping. At the basic level, to create a corporation, articles of incorporation will need to be filed with the State of incorporation, and Bylaws should be drafted to govern the corporation’s structure and operations. Shares of stock will then need to be issued to corporation’s owners - its shareholder.
Where traditional partnerships and LLCs tend to blur the line between roles of owners and operators, corporations typically stick to a strict separation between the duties of shareholders, directors and officers. In a typical corporate structure, Shareholders elect the Board, which in turn appoints the officers who run the day-to-day operations. For small businesses, the corporate structure may seem cumbersome and unnecessary, but corporations are excellent for businesses seeking to grow quickly, particularly through complex financing and capital raising. Institutional investors tend to prefer corporations, as they know and understand how corporations work, and as a result are more comfortable investing in this form of entity.
Corporations can be taxed either as a C or an S corporation. An S-election may be made only if the corporation has fewer than 100 shareholders who are all individuals or certain tax-exempt organizations, and none of whom are non-resident aliens. If taxed as an S corporation, income and losses pass directly through the corporation to the shareholders so there is no corporate tax. However, the big drawback of an S corporation is that there can be only one class of stock. This is a significant limitation for potential investors, and companies planning to raise capital typically don’t make an S election.
C corporations are subject to tax at both the entity and individual level, and cannot pass losses through to shareholders. On the other hand, C corporations are much more attractive to investors for several reasons, and companies that plan to grow and seek outside investment typically choose this form of entity. C corporations are not limited in the type of investors it can solicit, may issue different classes of stock with varying rights, offer tax advantages to venture capital funds, offer favorable capital gains treatment to certain investors, and employee salaries and other compensation, are usually fully deductible against the C corporations income. In a nutshell, if you plan to grow quickly and intended to do so by seeking complex financing and raising capital, go with the C corp; if you plan to set up a food cart business with personal funds, an LLC or S corp may be a more suitable option.
If your thinking about starting a business in or around Portland, Oregon or are interested in learning more about choosing the right business structure, contact us.