C Corps vs. S Corps vs. LLCs: Which Corporate Structure Should Angels Invest In?

Well, you have C Corps, S Corps, and LLCs. Do these differ, and if so, does the form of entity in which you invest even matter?

You bet it does. The differences in taxation, the flexibility in ownership, and the capital structuring among these three company structures can be significant.

C Corp., S Corp., and LLC: A Brief Introduction

C Corporation (C Corp.): Owners of a C Corp. are called “shareholders” or “stockholders.” As an investor, you’re a part-owner and are given stock certificates to evidence that ownership.

Additionally, from a legal perspective, a C Corp. is treated as a separate entity from its owners/shareholders. This separation shields you from debts or obligations the company may incur.

S Corporation (S Corp.): Like a C Corp., owners of an S Corp. are also called “shareholders” or “stockholders.” You, as a part-owner, are given stock certificates as proof of that ownership.

An S Corp. is also a separate entity from its shareholders, shielding you from debts or obligations the company may incur.

The main difference between a C Corp. and an S Corp. is how the income is taxed. We’ll expand the discussion of taxation later on in Part 3, “Company Structures and Your Tax Money.”

Limited Liability Company (LLC): Owners of an LLC are called “members.” Instead of stocks, you (as a member/part-owner of the LLC) receive “membership interest.”

This membership interest is usually expressed in percentages (e.g., a 10% membership interest) or in units (e.g., 10 units), which generally correspond to your percentage in ownership. [1]

Unlike shareholders of a C Corp. and an S Corp., who receive stock certificates to evidence ownership, LLC members receive charter documents, e.g., “Articles of Organization” and “Operating Agreement.”

An LLC also protects members from debts or obligations the company may incur.

Note: Although all three entities intend to shield members and shareholders from obligations incurred by the company, there’s no absolute guarantee that they will be shielded. Please consult with your lawyer.

What You’ll Learn in This Report

• Which corporate structure has a high flexibility and why you need it
• Which structure angel funds can’t invest in
• 2 reasons why seasoned investors don’t like to invest in this structure
• Why experienced investors care about employee options
• Which company structure allows you to make that agreement do whatever you want
• Tax payments and tax filing requirements for C Corps, S Corps, and LLCs
• Double taxation and single taxation and how they affect your investments
• Losses in this company structure can be used to offset future company income, which will result in tax savings
• Which structures may effectively lower your net investment and raise your internal rate of return
• Which structures require you to pay tax even if the company hasn’t actually distributed any profits to you
• Which structures require you to file a separate state income tax return in each state in which the company earns income
• Which structures make individual tax reporting more complicated and slow
• “One prominent angel”  said he won’t invest in this structure because he was spending an inordinate amount of money on his personal tax returns
• Which company structure do seasoned investors favor
• You may cut half of your tax payment upon a liquidation event with this structure
• Which structure allows you to roll the profits over into a future investment to postpone tax payments
• Which structure can create significant issue with employees in technology companies
• Which structure is better for employees in tech companies
• You should invest in a C Corp. if you fit at least 1 of these scenarios
• Why VCs typically don’t invest in this structure

Bonus

When you invest in this report, you’ll also receive a quick, easy-to-read 5-page report called “5 Reasons Seasoned Investors Prefer Companies Incorporated in This State” – a must-read for new angels and first-time entrepreneurs who are planning to raise money from professional investors.

What You Get

• C Corps vs. S Corps vs. LLCs: Which Corporate Structure to Angel Invest in and Why the Form of Entity Matters (PDF report: 11 Pages | Word Count: 2,700+)
• 5 Reasons Seasoned Investors Prefer Companies Incorporated in This State (PDF report: 5 Pages | Word Count: 1,100+)

Available to Members Only