From C-corps to limited liability companies (“LLCs”), we equip entrepreneurs with strategic knowledge and guidance on choosing a business entity that aligns with their goals and objectives. Protect your assets and optimize tax benefits with Crowley Law LLC.
Choosing the right business structure is a crucial milestone for any life sciences or other technology startup. At Crowley Law LLC, we understand this pivotal decision directly influences your venture’s future and growth potential. Here is why:
The choice of structure directly influences your income tax burden.
The tax forms you must file vary depending on the structure.
The structure you elect and how you operate it will influence asset protection.
Each structure has unique administrative requirements.
The business structure will influence your ability to raise capital.
Crowley Law LLC helps business owners understand the different business entity options available, their tax advantages and the extent of liability protection. Here are business entities we recommend for life sciences and other technology companies:
A corporation is a separate business entity from its owners, who are protected from liability. The type of income tax characteristics you elect (C-corporation or S-corporation) will determine the tax benefits:
These entities face double taxation—business profits are taxed at the corporate level and dividends to stockholders are taxed at individual rates. Losses are also accounted for at the corporate level. Since early-stage companies rarely generate profits, double taxation is usually not a significant issue. Many investors, especially institutional ones like venture capitalists, prefer this business structure because it shields them from having to realize the company’s losses.
Profits and losses are passed through to stockholders, who then pay taxes on their shares, avoiding double taxation. Stockholders must also account for any losses passed through to them. In the early stages, founders may prefer this structure because it allows them to deduct company losses on their personal tax returns. However, as the company grows, most eventually convert to C-Corp tax treatment.
An LLC is a business that offers the benefits of a corporation and partnership while avoiding some of their limitations. Here’s what you should know about an LLC:
Two or more entrepreneurs can come together to form and operate a partnership. However, the owners are generally liable for the business, the extent of which depends on the type of partnership:
Liability depends on partners’ investment stake and administrative roles. The General Partner has potentially unlimited potential liability. The liability of Limited Partners is generally limited to their investments in the entity.
Neither of these partnership forms is favored by investors in startups. Also, it is essential to have a written agreement of some type, usually called an operating agreement, in order to clarify the roles and responsibilities of the partners.
A sole proprietorship is a simple unincorporated business with one owner who receives all the profits but is liable for all debts and losses. In most jurisdictions, your life sciences or other technology startup will automatically be categorized as a sole proprietorship if you fail to select a business structure.
Crowley Law LLC has helped many entrepreneurs select business structures that align with their personal and business objectives. We provide detailed guidance on the entity options available to optimize your potential for growth and expansion. Key considerations we address when helping you choose the right business structure include:
The type of business structure you select will determine the extent of your liability protection, if any. LLCs, S-corps and C-corps offer personal liability protection. In contrast, partnerships and sole proprietorships offer limited liability or none, depending on the exact structure.
On the one hand, C-corps are subject to double taxes, where business profits are taxed on the corporate level and stockholder dividends are taxed at individual tax rates. On the other hand, LLCs and S-corps are pass-through entities for taxation purposes. This means profits and losses are passed through to the members, who report them on their individual tax returns.
Sole proprietorships and partnerships offer flexible management structures, allowing owners to retain full control over the venture. In contrast, LLCs, C-corps and S-corps provide more nuanced management options, with members and stockholders either directly managing the business or appointing a board of directors to oversee operations.
The type of structure you select for your business will influence your capital-raising avenues. C-corps offer significant flexibility when raising capital, while partnerships have more stringent rules. S-corps offer the flexibility of C-corps, but the number of shareholders is capped at 100.
The legal guidelines for establishing life sciences and other technology startups can be quite complex. Furthermore, the business structure you elect will impact your ability to raise capital, tax status, personal liability and ability to protect ownership interests.
Crowley Law LLC can help you maneuver your startup journey in the following ways:
The standout differences include:
An LLC is less formal to establish and features a flexible management structure. A corporation has a more formal formation process and takes a more defined structure with a prescribed hierarchy.
An LLC is owned by members and ownership interests may not be easily transferable. Stockholders own a corporation and shares can be more easily transferred or sold, subject to any agreements that restrict transfer.
In an LLC, members can decide how to manage business operations. They can also designate one member, a group of members or an independent individual to serve as Managing Member(s). On the contrary, a corporation is managed by a board of directors with powers to hire officers to handle day-to-day operations.
An LLC is treated as a pass-through entity for taxation purposes unless the members elect to be taxed otherwise. Members of an LLC must also pay self-employment taxes on their share of profits. An S corp can also opt for pass-through taxation. However, a C corp will always face double taxes on profits distributed to stockholders as dividends.
Both LLCs and corporations enjoy limited liability protection.
An LLC has relatively low compliance costs and minimal ongoing formalities. There is also no legal obligation to keep elaborate records or have regular formal meetings. A corporation faces more strict compliance requirements, such as holding annual meetings and filing annual reports.
Different business structures are treated differently for tax purposes:
Both LLCs and corporations offer very good protection against personal liability for owners of equity interests. Since the LLC is easier to maintain, some founders may favor that form initially.
In most cases, you can change the form of your business entity. For example, you could transition from an LLC to a corporation.
Unless you can express personal guarantee for an obligation of the corporation, you will not generally be liable for your startup’s debts and liabilities.
Your tech startup will not pay Federal taxes at the corporate level.
Running an S-corp rather than a partnership or sole proprietorship helps establish credibility with potential partners, vendors, employees and customers.
