In starting a NewCo, which comes first, the Company or the Technology? It is a bit like the chicken and egg story; it really doesn’t matter. You can create the company and fill it with technology; even years later. You can find technology and create the company overnight (or in a few days) either option works. The more important issue to resolve is the type of business structure you want; a Corporation, a Limited Liability Company, or some other structure. A few structures are defined below via the site www.investorwords.com:
Corporation: “The most common form of business organization, and one which is chartered by a state and given many legal rights as an entity separate from its owners. This form of business is characterized by the limited liability of its owners, the issuance of shares of easily transferable stock, and existence as a going concern. The process of becoming a corporation, call incorporation, gives the company separate legal standing from its owners and protects those owners from being personally liable in the event that the company is sued (a condition known as limited liability). Incorporation also provides companies with a more flexible way to manage their ownership structure. In addition, there are different tax implications for corporations, although these can be both advantageous and disadvantageous. In these respects, corporations differ from sole proprietorships and limited partnerships.”
Limited Liability Company: Often abbreviated as an LLC. “A type of company, authorized only in certain states, whose owners and managers receive the limited liability and (usually) tax benefits of an S Corporation without having to conform to the S corporation restrictions.”
Clearly, there are several structural forms available for your business. The best way to select the right one is review the options and discuss them with your attorney and/or accountant. The choices between Limited Liability Company or a Corporation have a lot to do with taxes, payout of cash, and ownership. There are pluses and minuses for each. Weigh the differences and identify which structure best fits your company’s future needs. Many technology and medical companies eventually become C Corporations. As defined in Wikipedia:
A C corporation is a corporation in the United States that, for Federal income tax purposes, is taxed under 26 U.S.C. § 11 and Subchapter C (26 U.S.C. § 301 et seq.) of Chapter 1 of the Internal Revenue Code. Most major companies (and many smaller companies) are treated as C corporations for Federal income tax purposes.
The income of a C corporation is double taxed, whereas the income of an S corporation (with a few exceptions) is not taxed at the entity. The income, or loss, is applied, Pro Rata, to each Shareholder and appears on their tax return as Schedule E income/(loss).
Unlike corporations treated as S corporations, a corporation may qualify as a C corporation without regard to any limit on the number of shareholders, foreign or domestic.
The C Corporation is one of the structures desired by the funding sponsors considering a future IPO. A C Corporation is registered with a state (Delaware for example) by filing the appropriate documents and paying the filing fee. You can work with an attorney to file the forms and your counsel will generate all the paperwork associated with the company creation. It is possible to go through the process without legal assistance, but not recommend. There will be associated costs of as little as a few hundred dollars to more than a thousand for creating the legal entity. It depends on the complexity and counsel billing rate. Ask the billing rate before you start and get an estimated total cost. Don’t suffer sticker shock after the job is done! Most of the structural issues can be changed later by your legal representation at modest cost.
You can follow Taffy Williams on Twitter by @twilli2861 and you can email him with questions at [email protected] or contact him via company contact info in the website. More Startup information is contained in his personal blog.