In creating a start-up, it is important to form the business as the type of legal entity that best suits its needs and goals. Because there are numerous forms of entities to choose from, each with their advantages and disadvantages, choice of entity can be, absent expertise, a daunting task.
The three most common types of entities to choose from are Corporations, Limited Liability Companies, and General Partnerships. Often, the manner in which the start-up is to be funded is a primary factor in entity selection. For example, if you are seeking funding from family, friends, or angel investors, it makes sense to form as an LLC. This is because an LLC is a “pass-through” entity: it does not have entity-level taxation. In other words, it is the responsibility of the LLC’s shareholders and members to pay taxes on the entity profits relative to their respective ownerships portions. In addition to this single layer of taxation, LLCs are also an attractive choice because an LLC’s owners, or “members,” are not personally liable for the debts of the company.
Some of the most famous companies in the world began as start-up LLCs:
YouTube was started by former PayPal employees Chad Hurley, Steve Chen, and Jawed Karim. In its early days, the company’s headquarters were located above a pizzeria and Japanese restaurant in San Mateo, California. Initially conceived of as an angel-funded operation, YouTube soon attracted VC funding from Sequoia Capital. Until the day it was bought out by Google for $1.65 billion, YouTube remained an LLC.
Facebook was formed in 2004 by Mark Zuckerberg, Dustin Moskovitz, and Eduardo Saverin as Thefacebook.com LLC. Like YouTube, Facebook had uncomplicated origins. Zuckerberg conceived of the idea while studying psychology at Harvard University. Originally just for Harvard students, Facebook soon spread across Boston, the greater United States, and ultimately the world. Today Facebook is worth over 100 billion dollars.
While determining whether an LLC is the right type of entity for your business can be a complicated decision, the actual steps to formation are relatively straightforward:
First, choose a business name. The name must be different from an existing LLC in your state, must indicate that it is an LLC (e.g. “LLC” or “Limited Company”), and must not include words restricted by your state (such as “bank” and “insurance”).
Second, file the articles of organization. These articles are a simple document that formalizes your LLC and includes important information like your business name, address, and the names of its members. In most states, you must file with the Secretary of State.
The hard part is getting your start-up from the garage to the big leagues. Before YouTube and Facebook made their respective journeys, they were faced with the same question that all start-ups face: choice of entity. The Law Office of Kristina M. Reed is highly experienced in all aspects of business law, from start-up to profitability. If you have questions about choice of entity for your start-up, please contact our office.