What Is The Difference Between Corporation Llc And Sole Proprietorship – Deciding what is the best legal structure for your startup? See what C-Corps and LLCs are, and the difference between these company formations
Startup founders eat difficult decisions for breakfast and one of their first snacks is choosing the most appropriate legal structure for their company.
What Is The Difference Between Corporation Llc And Sole Proprietorship
Once upon a time, startups planning to raise money from venture capital firms used a C-Corp structure and it became a standard for US-based startups. But as time went on, we learned that They are actually not the best course of action for Latin American companies that do not operate in the land of the free. At least when we talk about the fun task of paying taxes.
Llc Vs Inc (corporation)
Therefore, investors had no choice but to be flexible to adapt to different sets of circumstances in each startup. Even with that flexibility, how you set up your business from a legal and tax perspective still affects the likelihood of securing the investment.
We all know that building a profitable venture-backed startup requires investors to visualize its true potential, and investors don’t want the value created to go to waste due to a mistake in structuring their startup.
Ok, so you know what a difficult decision you will have for the next breakfast. The problem is that there is hardly any guidance for the specific needs of Latin American startups when it comes to company formation. Look no further than this comprehensive guide to C-Corps and LLCs focused on Latin American founders, just like you.
A C Corporation (C-Corp) is a legal entity that serves as an intermediary between the business’s operators and owners, who may or may not be directly involved in operations.
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The C-Corp is known for its “double taxation,” meaning that 1) the owners are responsible for paying personal income taxes on profits from dividends or the sale of C-Corp stock, and 2) the C -Corp is responsible for paying corporate income taxes annually.
C-Corps organize their capital in the family share structure. That’s why they allow for liquidation preferences, easy setup of stock option plans (ESOPs), and
A Limited Liability Company (LLC) is a type of organization made up of members, not shareholders. Each of these members pays taxes on a portion of their personal income.
As you may have noticed, the LLC is fundamentally different from a C-Corp in the way it organizes its capital. Your holdings are divided into membership units rather than shares.
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This type of tax structure is also known as “pass-through” because, in practical terms, the company itself does not owe corporate taxes: the tax liability is transferred to the people behind the company.
C-Corp and LLC structures differ greatly from each other, and each has its corresponding tax treatment under the Internal Revenue Code. Here’s a quick overview of the differences:
When evaluating new startup investment opportunities, potential angel investors and venture capitalists will pay close attention to the different tax characteristics of C-Corps and LLCs. Ultimately, this can determine whether or not your startup survives.
When we compare all those differences to reality, the main advantage of a C-Corp mainly revolves around the idea of a very successful company that is not planning an exit at all or is committing to an Initial Public Offering (IPO) like the only viable option. . A C-Corp’s tax circumstances operate under the assumption that the business will one day be very profitable, which, while it’s good to be ambitious, is not necessarily a realistic proposition for all startups.
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On the other hand, the most cited disadvantage of an LLC is the different capital structure. But get this: LLCs can still offer stock-based compensation and liquidation preferences even when they lack shares or interests to distribute. Sure, it will require more effort, but there are several configurable and versatile alternatives to do it with the help of a trusted lawyer.
Startup founders often use a C-Corp structure to prepare for an IPO. But unless it plans to go public in the next 12 months, that might be a bit much at the current stage. An LLC can easily be converted to a corporation later without necessarily having tax implications, but the opposite conversion would be much more complex in case an IPO is not in your plans.
In some cases, you may want to skip the idea of a C-Corp entirely and start with an LLC and then set up a tax-optimized corporate structure, like the Cayman Islands sandwich, adding a holding company as well. in the Cayman Islands. Investors are familiar with the structure and companies like Nubank used a Cayman Islands entity for their IPO.
Let’s say you are creating a company based in Mexico, but you need a US entity to receive investments. Having a C-Corp as a holding company will make your startup subject to taxes in the US, even if you haven’t made a single dollar there.
Infographic] Corporation Or Llc?
With an LLC as a holding company and legal entity in your own country, you will only pay taxes where they are actually due: where you operate, manage payroll, and make profits. Also known as in your own corner of Latin America.
Simply put, and speaking solely from a tax optimization perspective, an LLC would make more sense than a C-Corp for a Latin American founder with no US operations, but who needs a legal entity abroad.
Some founders have had to learn this the hard way: Read how creating a C-Corp cost Brian Requarth’s company more than $100 million in taxes.
However, not all investors would be comfortable or able to invest in an LLC, so it is always important to consult with yours before committing to a corporate structure.
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You’ll need to consider some fundamental questions before setting a course, particularly for companies based and currently operating outside of the U.S. Questions such as:
Choosing to form a C-Corp or LLC in the US is about considering how to get from point A (your local structure) to point B (the holding company) in the most tax-efficient way. But those aren’t the only two options for your business.
The fact is, you’re not as good at predicting the future as The Simpsons, so you should always commit to Minimum Viable Incorporation for the sake of your peace of mind and your budget.
For Latin American founders, that can often mean sticking to a basic corporate structure in their own country for as long as possible: think SAS in Colombia, SAPI in Mexico, LTDA in Brazil, etc. establish legal entities abroad until it is time to prepare to raise funds.
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We put together a decision tree to help you understand where you and your company stand and where to go from there.
Don’t take this as gospel; It is not here to choose for you, but to point you in the right direction.
Ultimately, early-stage startups could benefit from maintaining that LLC status and their tax savings before re-evaluating the situation later, when a change in corporate structure may become the right move, either because one of their potential Investors are putting their foot down or because your company is ready to go public.
Many Latin American startups are ideal candidates for the flexible and simple LLC corporate structure. While owners of both corporations and LLCs have limited personal liability, LLC owners also benefit from tax advantages, freedom of management, and a lack of onerous recordkeeping and reporting obligations.
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If you need advice on setting up an international corporate structure for your Brazilian startup, see how Go can make it happen. Choosing a business structure that fits your goals is as essential to business success as funds are. But as a newbie, it can be a little tricky to decide which one is best for you. Do you feel stuck deciding between an LLC, S-corp, or C-corp? Then this guide is the perfect starting point for you!
Read on to find out everything you need to know about these business structures and their advantages and disadvantages. And in the end you will have a good idea of which option is best for you!
Let’s start with the basics. Before you can compare different business structures, you need to understand what they are individually. So what is an LLC? Here’s what you need to know:
LLC means Limited Liability Company. This business structure protects business owners from personal liability for the company’s liabilities and debts. This means that if your business is ever sued or incurs debt, you won’t have to pay it out of your personal income. Instead, creditors can only go after the company’s business assets.
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LLCs are one of the easiest business structures to establish, making them a popular choice for new business owners.
LLCs offer income pass-through and a variety of tax options. This means you can choose to be taxed as a C-corp, S-corp, etc.
Because of its flexibility, you can establish a single-member LLC or add as many members as you want.
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