business-registration, business-structureI was talking to a mentor about forming the corporate entity for my startup. They stated that in order to make it easy to get VC and angel funding, I should create a C Corp. (I have a foreign co-founder, so I cant file an S election)
In addition, I was talking to another mentor, and he said that I should create myself an LLC to own my share of my startup (a C Corp) because an LLC offers more personal protection than a C Corp.
An example of this would be that I own 100% of Business LLC, which owns 50% of Business inc. When I want to invest more money into Business inc, I would put the money into Business LLC, which would then put it into Business inc.
What would be the pitfalls of the LLC method? Would setting it up this way affect VC/Angel investment in any way?
The businesses would be registered in the state of GA if that matters.
I am EU based and have limited understanding of the options you have available. I’ve run my own small business since 1994.
If you have nothing more than an idea, no proof of concept or anything other than a business plan, it could well be that your idea is months away from an investment by a third party. So while it is only just you, how you frame the business has some flexibility until you start bringing in money (either from a shareholder or customers).
An LLC helps in terms of liability - it is viewed by law as akin to another person - so by placing your business under an LLC, you can claim some tax back, start one or two trials and know that if things go sour, the company as an entity gets hit, not you personally. Thus the credit rating of the LLC will hurt, not you, your mortgage etc.
Liability alters if a court was to consider your actions were the result of undue care and attention. A kayak firm in the UK prosecuted directors when some of their customers drowned - Their Ltd (akin to LLC) did not protect them because the law determined that the Directors did not perform adequate health/safety care in place.
The tax advantages that you were quoted are possibly true - I cannot speak for GA but do know some states/provinces/countries offer incentives if you invest in startups. But conditions apply on types of startup and your relationship with the startup to avoid tax avoidance. You need talk to an accountant to clarify the benefits. For example, during the past 5 years in the UK, a number of people in the entertainment industry were found to have started up companies that would invest in new movies. This brought them tax breaks and allowed them to offset tax until a future date (like movie release, first profit etc). The thing is a huge number of them never went anywhere near release date, some were just used to pay the investor (who was an entertainer) an unofficial benefit (business trips reportedly related to filming were in fact holidays).
It is also worth pointing out that the more risk to your business, the more bang for the buck an investor will want. So if you just have an idea, no proof of concept, no customers expressing an interest, the risks are high that you will be less successful so an investor might ask for 50% or 90% before they give you cash.
So… if I were in your shoe’s, and I had nobody knocking just yet on my door wanting to give me money, I would just create an LLC. When you have something that might generate income or something that might excite an investor, then look into your options.
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