Choices in Business Legal Structure

Brad Feld explains that the best choice for structuring an entrepreneurial enterprise depends on the financing path you are ultimately planning on going down:

"S-Corp: If you are not going to raise any VC or angel money, an S-Corp is the best structure as it has all the tax benefits / flexibility of a partnership – specifically a single tax structure vs. the potential for double tax structure of a C-Corp – while retaining the liability protection of a C-Corp.

C-Corp: If you are going to raise VC or angel money, a C-Corp is the best (and often required) structure. In a VC / angel backed company, you’ll almost always end up with multiple classes of stock, which are not permitted in an S-Corp. Since a VC / angel backed company is expected to lose money for a while (that’s why you are taking the investment in the first place!) the double taxation issues will be deferred for a while, plus it’s unlikely you’ll be distributing money out of a VC / angel backed company when you become profitable.

LLC: Often an LLC (Limited Liability Company) will substitute for an S-Corp (it has similar dynamics) although it’s much harder to effectively grant equity (membership units in the case of an LLC vs. options in an S-Corp or C-Corp – most employees understand and have had experience with options but many don’t understand membership units.) LLC’s work really well for companies with a limited number of owners; not so well when the ownership starts to be spread among multiple people."