Determining the right type of entity to create
Starting a company is risky, and many fail. Even if things go well, someone might sue the business. One of the primary reasons for operating your business through a legal entity is to shield your personal assets from claims made by the creditors of the business. If you operate the business through a corporation or a limited liability company (often called an LLC) then the owners and operators of the business will not generally be responsible for the liabilities of the business. Other legal structures like partnerships don't offer the same protection for all owners of the business. So between an LLC and a corporation, what's the best structure for you?
One of the key considerations in choosing the type of legal entity is the tax treatment of the entity. Every dollar earned by a Subchapter C corporation is subject to tax at the corporate level. If the corporation then distributes that same dollar (net of the corporate tax) to the shareholders, it is subject to tax a second time at the shareholder level. This so-called "double taxation" is a major cost to any entity that will be generating and making to its shareholders. In contrast, LLCs and Subchapter S corporations are referred to as "pass through entities" because corporate —even if distributed to the shareholders—generally are taxed only one time: at the shareholder level. Similarly, the owners of an LLC or Subchapter S corporation may be able to offset personal income from other sources against losses of the business, thereby reducing their personal tax burden.
So it would seem to make sense that most every business should be structured as an LLC or Subchapter S corporation. Then why is it that most technology and life sciences are structured as Subchapter C-corporations?
First, most technology and life sciences
Finally, there are a number of non-tax reasons most technology and life sciences
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- Allocating equity among founders
- Vesting restrictions on shares held by the founders
- Vesting terms that make sense
- Accelerating vesting on a sale or termination
- Tax implications related to shares that vest
- Rules for foreign founders in the US on a student visa
- Who owns your IP
- Non-competes with former employers
- Take a good idea with you when you leave a company
- Retaining a license to your IP
- Founder compensation
- Founder employment agreements
- Accelerating vesting on a sale or termination
- Vesting terms that make sense
- Tax implications related to shares that vest
- Difference between consultants and employees
- How startups compensate employees
- Foreign employees and their need for a visa
- Unpaid interns
- Non-competes with former employers
- Reserving shares under the company’s option plan
- Agreements with employees
- Hiring a team before securing funding
- Vesting restrictions on shares held by the founders
- Accelerating vesting on a sale or termination
- Vesting terms that make sense
- Tax implications related to shares that vest
- Difference between options and restricted stock
- Tax differences between ISOs and NSOs
- Granting options vs. issuing restricted stock
- Advisory board setup and compensation
- Reserving shares under the company's option plan