While CTAN will consider investing in any form of legal entity, the two most commonly seen are Limited Liability Companies (“LLC’s”) which are electing to be taxed as a partnership and therefore pay no tax at the Company level, and C Corps which are Corporations subject to the Corporate taxation regime in addition to any tax borne by shareholders.
While S Corps are very similar to LLC’s taxed as partnerships, and there are far more S Corps in the US than C Corps, they are not often seen in the Angel Investment arena for three reasons:
- Can only have one class of stock, therefore not possible to have typical situation where founders own common, and new investors own preferred
- Can only have 100 shareholders – usually not a problem initially, but we do have portfolio companies now with more than that
- No foreign shareholders – we see many situations with foreign shareholders
LLC’s and C Corps are not subject to the S Corp limitations, and are therefore most commonly used.
With regard to LLC’s vs. C Corps, it has been our observation that in the Angel Space the “default” choice has appeared to be C Corps. It has also been our observation that many start‐ups are not fully aware of the potentially material impact adoption of one structure vs. another can have on both investors and founders downstream. We are focusing on educating our CTAN members and other investors on these considerations, and it is of equal importance to founders.
The headline is that we believe, contrary to what you may have read or heard previously, that startups should consider the LLC vehicle as the default option for legal structure.
The reasons are two‐fold: . . . . . .>>> READ MORE at: