The attorneys of Wendel Rosen’s Technology Practice Group have compiled this list of 10 common mistakes they’ve seen in the trenches. Smart companies will take the time to address these issues early in formation to prevent a future situation that could turn into a company killer.
1. Choosing the Wrong Type of Entity
A big decision prospective company founders face is determining the type of entity formation their company should take – a “C” corporation, an “S” corporation or a limited liability company (LLC). In a nutshell, LLCs and “S” corporations have significant tax advantages. However, “S” corps can offer only a single class of common stock. That eliminates them as an alternative for most fast-growing tech companies, since investors typically want a different class of stock than those desired by company founders and employees.
LLCs can offer different classes of ownership interests. However, some investors dislike LLCs, because the company’s income and loss will be reported on the owners’ personal tax returns. Many outside investors prefer “C” corporations. Therefore, the discussion generally starts with forming a “C” corporation and then explores whether the tax benefits of LLCs or “S” corps outweigh the presumption in favor of the “C” corporation.
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