Which state to incorporate in if I plan to raise money eventually? Should it be LLC, S-corp or C-corp?


1

Which is the best state to incorporate in if you eventually want to finance your startup with angel funding?

I currently have an LLC in my state and not sure if it will be optimal. I went with an LLC since the paperwork is easier and I can file it as a single member LLC for simplicity.

Raising money wasn't part of the plan when forming the LLC. Tax efficiency is also important to me, as is a way of distributing profits to everyone with equity in the business.

Incorporation Legal Corporate Structure

asked Mar 19 '14 at 21:26
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Regina Villalon
70 points

2 Answers


2

You'll need a Delaware C-corporation.

It's what almost 100% of investors will want, if not require.

Reasons:

  • Delaware has the most corporate friendly laws that cut through crap, especially in the event it comes to litigation.
  • C-corps are structured for both external investment and larger entities.
  • Shareholders have no tax implications from profits or losses as a result of owning shares in the entity, and would only have to pay taxes if they were to receive a dividend payment from the company or were to sell their shares for a profit.
  • "Corporate Veil" of C-Corps is very strong in legal situations. Virtually unheard of that a shareholder would have any legal liability for the actions of the business by simply being a shareholder.

The main downside to C-corps (which you can't avoid if you're going to be raising money): Somewhat more costly to maintain from a legal and tax filings perspective, and face "double taxation" when distributing profits to shareholders.

answered Mar 20 '14 at 02:29
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Nishank Khanna
4,253 points
  • You can file for an S-corp status if you don't plan to raise money immediately and to pass profits or losses from the company to your initial shareholders for the first year or two before you actually bring investors as additional shareholders. – Webbie 3 years ago
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This was covered here, but you should consult a professional. The answer will depend on where you live, e.g. not all states are equally (un)favorable), your ownership setup and how far out is fundraising. I heard DE and CA are preferred by Venture Capitalists and NY isn't very liked.

answered Mar 20 '14 at 01:45
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Webbie
2,825 points

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Incorporation Legal Corporate Structure