In a recent blog post, Fred Wilson of Union Square Ventures explains the various type of entities you’ll find in the wild ‘nd wacky corporate world. Sound boring? Well, that depends if you’re a StartupBook reader for our gossip-rag pieces or for our entrepreneur advice.
First, you should consider the fact that incorporating as a company may not be in your best interests — like if you’re a seller on Etsy or eBay.
If you do make your business official, you want to ensure there are clear boundaries between your identity and your company, particularly with liability. Make sure you limit your liability with issues like accounting, services to be rendered, and lawsuits. You don’t want to get thrown in the slammer for a company delivery error.
With taxes, you can either establish yourself as a “flow through entity” or a “tax paying entity.” Flow through entities pass their income and tax obligation to the owners of the business — meaning you’re liable if the checks to Uncle Sam aren’t cashed. Many local restaurants and merchants are flow through entities. Tax paying entities pay corporate-level taxes — these are most major tech companies.
If you are considering splitting ownership with a partner, or taking on outside investments, you’ll need to be incorporated as well.
Most startups become Limited Liability Companies (LLCs), which allow companies to be recognized as corporations in terms of liability, take on outside investments, and have “flow through” taxes.
LLCs can eventually grow into C Corporations, which is the status of all our favorite public stocks. These provide more advances methods of splitting ownership and raising capital, and are officially “tax paying entities,” meaning the founders are no longer personally responsible for taxes.
A “hybrid” of an LLC and a C Corporation is the S Corporation, which is a “flow through entity” with one class of stock and less than 100 shareholders.
Yet another corporate creature is the Limited Partnership (LP), which are “flow through entities” you may recognize as Bloomberg LP and many venture capital funds. LPs give investors limited liability, while the General Partners hold most of the liability.
If you’re an investor, make sure you know what sort of liability and tax ownership you are getting into. If you’re a founder, make sure you protect yourself from too much liability.
But most importantly: “Get a good lawyer and tax advisor.”