Legal Question in Business Law in Illinois

Re: Start-Up Entity - Formation

Hello,

I'm a Silicon Valley attorney and have dealt with a variety of technology startups looking for angel or venture capital funding. If you are looking for angel investment I would highly recommend forming a corporation. It's easier to structure the financing transaction from a legal standpoint and this often means reduced attorney fees. The other important consideration is that angel investors are more familiar with securing preferred stock in return for their investments rather than LLC "units". Often we have to convert LLCs into corporations (often Delaware corporations) before they can be funded.

Regards,

Re: Start-Up Entity - Formation

In general, LLCs are the more modern and flexible form of business. They have fewer requirements than corporations, meaning there's no need for corporate minutes, bylaws, annual shareholders meetings, etc. Plus, unlike S Corporations, non-resident aliens can be active owners of an LLC. Also, while LLCs offer the same liability protection as corporations, they are taxed as sole proprietorships or partnerships, which makes them "pass-through" entities for tax purposes.

On the other hand, corporations are the more traditional form of business. Many investors would still rather invest in a corporation. However, corporations are subject to more regulation than LLCs, meaning they have to deal with formalities such as corporate minutes, bylaws, and annual shareholders meetings. Plus, unless a Subchapter "S" election is made, corporations are subject to a double tax. Making a "Sub S" election avoids taxes at the corporate level, so earnings are taxed only once at the personal level. Thus, income and losses are "passed-through" to the shareholders, thereby resulting in considerable tax savings. However, be aware that no shareholder of an S Corp can be a non-resident alien. There are also restrictions on the number of shareholders in an "S" Corp.

Re: Start-Up Entity - Formation

You have a few options.

1) You can form an LLC now and then convert to a corporation later on. This can be a bit cumbersome, but its worth mentioning the option.

2) You can form an S-Corporation. S-corps have the benefit of pass-through taxes but are otherwise treated just like regular C-corporations.

3) You and your co-founders can form an LP and be general partners. Any future investors can be limited partners.

4) You can just form a C-corporation and swallow the dividend taxes. A C-corp is frequently the best model for seeking investment.

5) You can remain an LLC, and only grant membership rights to the original founders. This is simplest method in terms of corporate formalities, but will give you much less protection when seeking investors.

If you want to talk about the details, please feel free to give us a call.