Five Reasons a Startup Should Form a C-Corporation

More often than not, many startups hope to grow and become the next Facebook or Amazon. The objective is to start by seeking capital from investors. That capital can then be used to hire engineers and fund any other processes necessary for profitability.

Well, there are many things to consider. Yet, one thing remains true–venture capitalists usually don’t want to be part of an LLC. In fact, most investors want to find a startup that is engaged in C-Corporation formation.

The reason is investors want to be passive about their investments in this genre. And, there are other benefits as well. Keep reading to learn more.

Zero Pass-Through Tax

Investors don’t want to worry about additional taxes. The good news is C-Corporations do not have pass-through taxation. In contrast, S Corporations and LLCs require the owners to pay tax on the company’s income.

This means that if an LLC has a profit of $1 million and keeps that money to be invested into the company, then a 10 percent shareholder must pay tax on $100,00 pass-through income. This is true even if the company does not distribute any of the money to the shareholder.

This is just one reason why angel investors prefer the C-Corporation.

Issue Qualified Small Business Stock

Under Section 1202 of the Internal Revenue Code, C-Corporations can potentially qualify for the exclusion from tax for small business stock. And, investors like stocks.

Receive a W-2

If you need to finance a house or a car, then banks prefer a W-2. You see, if your company is an LLC taxed as a partnership, then you will receive a K-1.

In addition, you cannot be the employee of a company in an LLC. On the other hand, a C-Corporation allows you to be an employee of your company. Now, you can take your compensation as wages and provide a W-2 as proof of income.

Grant Employees Equity

If you can’t afford to pay massive salaries, then one of the next best things are stock options for your employees. Moreover, it is easier to configure an employee stock option plan as a corporation than it would be for an LLC. In LLCs, shares are called units.

Still, tax and regulation of units is much more complex when the LLC is taxed as a partnership. It’s much simpler to issue stock as a corporation.

You Can Participate in Tax-Free Reorganizations

This means you can be bought out for stock on tax-deferred terms. Plus, you don’t have to pay tax on the stock received until you sell it.

With an LLC, that has an offer to be bought out from another company, the rules are the receipt of the stock is taxable to the owner. It doesn’t matter if the stock cannot be sold to make an income to pay the tax.

In Conclusion

It goes without saying that the C-Corporation is the ideal format for a startup. As a result, more investors will be interested and it is easier to distribute and sell stock for profit.