Switching entities for funding

Should you start off as an LLC and switch to a C-Corporation for funding?

Some new businesses intend to seek venture capital or eventually desire to become a publicly held company. Generally, venture capital investors will only invest in corporations, not LLCs, and public companies must be in the form of a C-corporation. However, this does not necessarily mean that you must start your business off as a corporation, as there are some downsides. 

C-corporations are required to hold board meetings, keep minutes, and are subject to double taxation. If you register your corporation in Delaware but are conducting business in California, you will be subject to taxes in two states. While this may be the preferred structure for businesses that need venture funding early-on, for other businesses with less immediate funding needs, this may unnecessarily burden your growth. Becoming a C-corporation too early can divert the founders’ time and resources when the main focus should be on growing the business.

Therefore, entrepreneurs may want to consider forming an LLC or other entity and only switch when the business requires outside investment to scale. At that point, you can perform a statutory conversion. California has streamlined this process for LLCs by allowing conversion to a corporation mainly by filing a single document with the Secretary of State. However, note that other steps may be necessary to line up your LLC's affairs with the new business structure, which can be burdensome depending on your level of activity. 

While this may not be the best approach for every venture, for some it can help facilitate growth in the short term with the flexibility to expand in the future. It is always best to consult with an attorney and an accountant early on to discuss your individual goals and the best long-term strategy for your business. 

 

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This blog is for informational purposes only and is not legal advice.