The Legal Entity for Your Tech Startup: Which Structural Form Is Best in 2022?

Best Legal Entity for Your Tech Startup

Choosing a business entity for your company can be difficult. You want to make sure that your company is structured in a way that will provide the best protection for you and your assets, but also present the lowest tax burden possible. Choosing the wrong entity structure could cost you thousands of dollars every year. Fortunately, there are several options available when it comes to choosing an operating structure: C-corp (or corporation), S-Corp (or Subchapter S corporation), and LLC (or Limited Liability Company). Each type of business has its own unique benefits and drawbacks, and each is better suited for different types of startups.

An LLC is a flexible and easy-to-manage business entity.

If your tech startup is a single-member LLC, you’ll want to consider the following:

  • An LLC is a hybrid of a corporation and partnership. Like a corporation, it allows you to create separate entities within your company. On the other hand, it also can be managed like any other business with just one owner (unlike corporations).
  • An LLC is more flexible than corporations in terms of its owners’ rights and liabilities. For example, if one member leaves an LLC but hasn’t been paid back their investment yet (or at all), they may not have ownership rights anymore without some kind of agreement between them and those who remain members. In contrast, this isn’t an issue when dealing with S-Corps or C-Corps because there are no investors involved, they’re owned by shareholders instead. However, this means that if there’s only one shareholder left behind after others leave their positions within an S-Corp or C-Corp then it may be harder for them to continue operating normally as opposed to having three cofounders who can help each other out when necessary (and legally).

The formation of your LLC is more complex than other business entities.

An LLC is a more complex entity than a sole proprietorship or partnership. It’s also more complex than a corporation, nonprofit organization, or S-corp. The reason for this is that it combines elements of all these entities to create an entity with flexibility and some safeguards against personal liability.

An LLC has limited liability for its owners, the members, and like a corporation can have one or more members. However, unlike corporations and nonprofits (nonprofit LLCs), there are few restrictions on who may be granted membership in an LLC, no charter, bylaws, articles of incorporation, or other formalities are necessary to form one. In fact, you can even start your business without filing any paperwork at all if you so choose!

An LLC offers less paperwork than an S-corp.

An LLC is a pass-through tax entity, meaning it does not pay taxes. Instead, the profits and losses of your LLC “pass through” to you (the owner) and are reported directly on your personal tax return.

An S Corporation is also a pass-through tax entity; however, an S corporation is a separate taxable entity that pays its own federal income taxes at corporate rates. You will still receive a K1 Form from them each year with which to report your share of those profits or losses on Schedule E of Schedule C, as well as other schedules pertaining to capital gains or losses.

An LLC allows for a wider range of members than an S-corp.

One of the other major differences between an LLC and an S-corp is that while both types of companies can have multiple owners, the LLC allows for a wider range of members than an S-corp. An LLC can be owned by either individuals or other LLCs. An S-corp is limited to US citizens or permanent residents as members.

An S-corp offers the benefits of an LLC, but with some additional tax advantages.

For tech startups, an S-corp offers the benefits of an LLC, but with some additional tax advantages. The biggest benefit for tech startups is that you can defer paying taxes on your profits and thus keep more money in your bank account during those early years when you’re investing heavily in resources, marketing, tech development and other essential costs.

S-corps are also good for rapid growth companies because they allow you to retain as much employee stock option value as possible by not having to pay income taxes every time someone exercises their options or sells them at a gain (if they do so within seven years).

Forming an S-corp requires more paperwork than an LLC.

It depends on your startup’s needs.

If you’re a business that plans to grow quickly and raise a lot of money, then an S-corp is probably the best choice for you. While it does require more paperwork than an LLC, it also offers certain tax benefits and helps startups avoid double taxation (which can happen with C-corps). On the other hand, if your business is small or doesn’t plan on raising any outside funding anytime soon, then an LLC might be the right choice for you.

A C-corp is the best choice for tech startups when they are first launched and are growing quickly.

If you have a large number of shareholders, or if you have substantial revenue, you should consider making your company a C-corp. The reason for this is simple: in addition to the transfer restrictions that apply to LLCs and S corps (see above), C corps have something called “double taxation.” This means that companies with more than one owner pay taxes on their income twice: both when it’s made and again when it’s distributed as dividends to shareholders.

A tech startup with many employees may qualify as a C corp because they are likely generating significant amounts of income, and even more so if they are paying out large amounts in shareholder distributions once they’ve gotten started successfully!

Filing as a C-Corp requires more paperwork than filing as either an S-Corp or LLC.

The most common mistake we see is that people think C-corp tax benefits are similar to S-corps. This isn’t true. The reason you’d choose a C-Corp over an LLC or S-Corp is because you want to make sure the company can be sold later (i.e., go public). If this isn’t your dream, then you might want to stick with an LLC or S-Corp unless there’s another reason for having a C-Corp that makes sense for your business and its goals (for example: if your company has foreign investors who require formal stock ownership).

While there are more steps required when filing as a C-Corp than as either an LLC or S Corp, it’s still not all that complex if done correctly from the beginning. And if done incorrectly later on down the road, it could cost thousands or even tens of thousands of dollars in fees just trying to fix things later on! So don’t take the easy route here – do it right from day one!

When choosing a structure, consider where you are, where you want to be, and how long it will take you to get there.

When deciding on the right structure for your business, consider what direction you want to take. If you’re just starting out and have a small team, an LLC might be best. Once you start growing and hiring more people, then it’s time to consider something like an S-Corp or C-Corp.

Consider where your company is now, where it’s going and how long it will take to get there. Then create a road map for yourself so that when the time comes that you need to make a change in structure or formality with how things are done around here (as well as other aspects of running a business), everyone knows about it beforehand so no one feels blindsided by these changes coming from out of nowhere.


In the end, it’s up to you to decide which type of business entity is best for your startup. But if you’re looking for a quick answer, we recommend starting with an LLC before deciding whether or not you want to convert it into an S-corp or C-corp later on in the development process.

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