LLC as a Startup Vehicle
Compared to corporations, LLCs offer entrepreneurs several advantages that often make them a more attractive choice for starting a new business. For example, LLCs are typically more flexible than a corporation, cost less to start up, and require less paperwork, both initially and on an ongoing basis.
These features can be enticing for startups, so if you’re in this situation and you’re wondering about issuing stock through an LLC, it’s important to consider the reasons behind your need for a business structure that can issue stock. You may find that, while the ability to issue stock is one path toward meeting your particular need, you might also be able to accomplish your goals through an LLC rather than a corporation.
Related: LLC (Limited Liability Company) – Start an LLC Online
A corporation’s power to issue stock gives it a big advantage when it comes to raising capital. For both institutional investors and individual investors, funding in the shares of a company is usually a far better option than investing money in an LLC.
For institutional investors, in particular, assets in LLCs are trickier from a tax perspective, as LLCs are flow-through entities when it comes to taxes. This means income induced by the LLC flows through the LLC to be taxed in LLC members’ hands, which can have potentially negative consequences for the institutional investor’s tax situation.
Regardless, the same may not hold for the individual, or angel, investor. While stocks deliver an efficient method of investing in a business for individual investors, they are more likely to take a more flexible, unique approach to assessing investment opportunities. For such investors, the inability to invest via the purchase of shares may be a negative consideration, but other factors may be sufficient to invest in an LLC attractive to them.
In many cases, if your plan is to raise capital through investors, the corporate network will likely make more sense. However, if you’re intending to primarily pursue individual or angel investors, an LLC could still be a viable business structure.
Without a doubt, shares deliver an efficient way to provide multiple ownership interests in a business. But if you’ve been thinking about a corporation mainly because you plan on having multiple owners of your business, it may not be necessary to write off an LLC as a viable option just because LLCs can’t issue shares.
While multiple LLCs are single-member LLCs, you can also form multi-member LLCs. Multi-member LLCs offer the same advantages and features as single-member LLCs. For instance, members of a multi-member LLC have the same limited liability safety as the owner of a single-member LLC.
Although theoretically there’s no real limit to the number of members you can have in a multi-member LLC, each member’s interest in the LLC should be set out in full in the LLC’s operating agreement. From a practical perspective, then, if a large number of people will hold ownership interests in your startup, a corporation may be the better choice despite its decreased flexibility and the increased costs and filing requirements.
One important consideration in choosing between a corporation and an LLC is your ultimate goal for your new business. For example, if your goal is to grow your business rapidly to attract potential buyers for a big buyout, or you want to eventually take your business public through an initial public offering (IPO), a corporation would be the better structure for your company.
While you can always change an LLC to a corporation in the future, additional costs are associated with this change, so starting as a corporation might be your best option.
On the other hand, if you plan to resume running your company for the long term, you may not need the ease of transfer of rights that stocks provide. In such cases, the benefits of running your company as an LLC may outweigh the disadvantages of not being able to issue stock.
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