Selecting the Right Entity for Your Tech Startup

Nebraska, and neighboring Midwest states, have developed a reputation as the “Silicon Prairie,” a prime location for technology startups. The recent tech startup boom in the Midwest can be attributed to the lower cost of living, knowledgeable tech labor force, and willingness of the community to embrace the startup. For many of these startups, besides the intense need to develop and protect the technology, a common issue is picking the right business entity structure.

 

In picking the right entity for the startup, several considerations should be weighed, including the need for liability protection, how the company will fund operations, and the most beneficial tax status. For example, if a tech startup is developing a product that will take a substantial period to produce, and likely need multiple rounds of equity financing involving institutional investors, with other funding coming through debt, the demand for classes of shares, preferences, and conversion rights, may require that the startup to form as a C-corporation, with corresponding tax status. On the other hand, if the startup only intends to have one round of equity financing, through a “friends and family” offering, a limited liability company may be appropriate, providing additional flexibility to select tax status.

 

Picking the right type of entity is important for the success of a tech startup, with many considerations to weigh. Ultimately, as facts change, it may be possible to change the structure of your company, but initial selection should not be taken lightly and can reduce problems as your company grows.

© 2017 Vandenack Weaver LLC
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When Should I Use an LLC vs. a Corporation?

A Video FAQ with Mark A. Williams.

A corporation cannot be used if you want to be taxed like a partnership. An LLC, or limited liability company, can elect any kind of tax treatment. So if you want the ultimate flexibility in how you are going to be taxed, the limited liability company is definitely the way to go. Also, a limited liability company gives you greater flexibility in determining the rights of the various types of owners.

Now a corporation, on the other hand, has been around for a very long time so there is a good established set of law and rules that apply to corporations. So for some people, the comfort of knowing exactly what they are getting into outweighs the flexibility that the limited liability company might provide.

© 2014 Parsonage Vandenack Williams LLC

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What Is an LLC and Why Should I Form One?

An LLC is a limited liability company and forming a limited liability company is basically to run a business out of or to own real estate or some other type of property. So if you are going into business or you are buying property as an investment, an LLC is one type of entity that you could look at forming, along with a corporation or a partnership. The pros and cons of those different business entity types are numerous, so you really have to get good counsel to make those decisions.

© 2014 Parsonage Vandenack Williams LLC

For more information, Contact Us