This post is part of Priori’s new blog series “From Our Network,” where we feature lawyers in our network discussing important issues small businesses face. After every post, we give our readers a chance to ask the lawyer questions, and the lawyer picks 1-2 to answer. In today’s post, corporate lawyer Mark Koffsky answers a reader question about a new tech company trying to figure out whether an LLC or C-Corp is the right choice.
Thank you for laying out the benefits of an LLC. I'm starting a new tech company and heard that investors will only invest in corporations. How should I think about what to do?
It is true that some in the investment community will only invest in a corporation, and often only a Delaware “C” Corporation. But I believe it is equally true that the investment community understands that many startups begin as LLCs in their home states. If your business is attractive enough to merit outside investment that is contingent on the business being a corporation, it is always possible to convert to a corporation at that point and even move states where the entity is domiciled. Of course, the legal cost and tax consequences of such a conversion must be carefully evaluated.
All things being equal (which, I admit, they never are), the LLC is often the better entity for a startup rather than a corporation because of its flexibility and the possibility of deducting business losses on the members’ personal tax returns. But either way, operating a corporate entity properly is the key to keeping your personal assets away from any liabilities incurred by your company.
Best of luck to you!