Your capital raise can be dead on arrival if you operate within the improper legal entity. Choosing the appropriate legal structure is crucial for your company and potential investors. Popular entities include Limited Liability Companies (LLCs), S Corporations (S Corps), and C Corporations (C Corps). Each structure has unique advantages and disadvantages for raising capital. Let's explore these differences.
Limited Liability Company (LLC): LLCs offer limited liability protection and pass-through federal tax treatment, avoiding the double taxation of C-Corps. Capital Raising Considerations: LLCs are less attractive to venture capital funds due to tax restrictions but may appeal to angel investors and high-income individuals who benefit from pass-through taxation. LLCs are also ideal for syndicating funds for specific investments, like real estate.
S Corporation (S Corp): S Corps combine elements of corporations and partnerships, offering limited liability protection and pass-through taxation. However, they have strict eligibility requirements, including limits on the number and type of shareholders. Capital Raising Considerations: S Corps are limited to 100 U.S. resident individual shareholders, excluding investment funds. They can only issue one class of stock, which investors typically find less attractive. S Corps are more suited to raising debt rather than equity.
C Corporation (C Corp): C Corporations offer a robust structure with distinct legal advantages, making them appealing for raising capital. Capital Raising Considerations: C Corps qualify for Qualified Small Business Stock, allowing exclusion of up to $10 million of capital gains on an exit. They have no investment restrictions from venture funds and institutional investors and provide familiar equity structures, increasing investor comfort. C Corps also offer extensive legal statutes and case law, giving more certainty in corporate matters.
Conclusion:
Choosing the right business structure is key to effective capital raising. LLCs offer flexibility and tax benefits but may face investor challenges. S Corps provide tax benefits but have shareholder restrictions.
C Corps are most attractive to investors due to their established structure and potential for high growth, despite double taxation. Consider the nature of your business, growth objectives, and investor preferences. Professional guidance is essential to make the best choice for your specific circumstances, positioning your business for successful capital raising and growth. You deserve dedicated legal counsel to grow your business.
The Law Office of Langston A. Tolbert PC advises Los Angeles startups and small businesses on corporate governance, capital raising, and M&A. For personalized advice on choosing the right business structure for raising capital, contact us for a free consultation.
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