From The MBA Mondays Archive

In the comments to Valuation vs Ownership, Mike Nolan said:

Just today I talked with an entrepreneur developing a SAAS in an educational space. His questioned focused on how to set up his first LLC and be prepared for funding rounds.  As usual, I recommend reading past articles on for a look at how investors think. Fred's post today could not have come at a better time.  Fred – perhaps you could directly address early formation of LLCs by companies to make it easier to interact with investors. Tips for corporate structure, units vs. member interests, etc.

Well it turns out there was an old MBA Mondays post that addressed those issues. So I will re-run it today.


I'm taking a turn on MBA Mondays today. We are moving past the concepts of interest and time value of money and moving into the world of corporations. Today, I'd like to talk about what kinds of entities you might encounter in the world of business.

First off, you don't have to incorporate to be in business. There are many people who run a business and don't incorporate. A good example of this are many of the sellers on Etsy. They make things, sell them, receive the income, and pay the taxes as part of their personal returns.

But there are three big reasons you'll want to consider incorporating; liability, taxes, and investment. And the kind of corporate entity you create depends on where you want to come out on all three of those factors.

I'd like to say at this point that I am not a lawyer or a tax advisor and that if you are planning on incorporating, I would recommend consulting both before making any decisions. I hope that we'll get both lawyers and tax advisors commenting on this post and adding to the discussion of these issues. I'll also say that this post is entirely based on US law and that it does not attempt to discuss international law.

With that said, here goes.

When you start a business, it is important to recognize that it will eventually be something entirely different than you. You won't own all of it. You won't want to be liable for everything that the company does. And you won't want to pay taxes on its profits.

Creating a company is implicitly recognizing those things. It is putting a buffer between you and the business in some important ways.

Let's talk first about liability. When you create a company, you can limit your liability for actions of the corporation. Those actions can be for things like bills (called accounts payable in accounting parlance), promises made (like services to be rendered), and lawsuits. This is an incredibly important concept and the reason that most lawyers advise their clients to incorporate as soon as possible. You don't want to put yourself and your family at personal risk for the activities you undertake in your business. It's not prudent or expected in our society.

Taxes are the next thing most people think about when incorporating. There are two basic kinds of corporate entities for taxes; "flow through entities" and "tax paying entities." Here is the difference. Flow through corporate entities don't pay taxes, they pass the income (and tax paying obligation) through to the owners of the business. Tax paying entities pay the taxes at the corporate level and the owners have no obligation for the taxes owed. Your neighborhood restaurant is probably a "flow through entity." Google is a tax paying entity. When you buy 100 shares of Google, you are not going to get a tax bill for your share of their earnings at the end of the year.

And then there is investment/ownership. Even before we talk about investment, there is the issue of business partners. Let's say you want to split the ownership of your business 50/50 with someone else. You have to incorporate to create the entity that you can co-own. And when you want to take investment, you'll need to have a corporate entity that can issue shares or membership interests in return for the capital that others invest in your business.

So now that we've talked about the three major considerations, let's talk about the different kinds of entities you will come across.

For many new startups, the form of corporate entity they choose is called the LLC. It stands for Limited Liability Company. This form of business has been around for a long time in some countries but became recognized and popular in the US sometime in the past 25 years. The key distinguishing characteristics of a LLC is that you get the limitation of liability of a corporation, you can take investment capital (with restrictions that we'll talk about next), but the taxes are "flow through". Most companies, including tech startups, start out as LLCs these days. Owners in LLC are most commonly called "members" and investments or ownership splits are structured in "membership interests."

As the business grows and takes on more sophisticated investors (like venture funds), it will most often convert into something called a C Corporation. Most of the companies you would buy stock in on the public markets (Google, Apple, GE, etc) are C Corporations. Most venture backed companies are C Corporations. C Corporations provide the limitation of liability, provide even more sophisticated ways to split ownership and raise capital, and most importantly are "tax paying entities." Once you convert from a LLC to a C corporation, you as the founder or owner no longer are responsible for paying the taxes on your share of the income. The company pays those taxes at the corporate level.

There are many reasons why a venture fund or other "sophisticated investors" prefer to invest in a C corporation over a LLC. Most venture funds require conversion when they invest. The flow through of taxes in the LLC can cause venture funds and their investors all sorts of tax issues. This is particularly true of venture funds with foreign investors. And the governance and ownership structures of an LLC are not nearly as developed as a C corporation. This stuff can get really complicated quickly, but the important thing to know is that when your business is small and "closely held" a LLC works well. When it gets bigger and the ownership gets more complicated, you'll want to move to a C corporation.

A nice hybrid between the C corporation and the LLC is the S corporation. It requires a simpler ownership structure, basically one class of stock and less than 100 shareholders. It is a "flow through entity" and is simple to set up. You cannot do as much with the ownership structure with an S corporation as you can with a LLC so if you plan to stay a flow through entity for a long period of time and raise significant capital, an LLC is probably better.

Another entity you might come across is the Limited Partnership. The funds our firm manages are Limited Partnerships. And some big companies, like Bloomberg LP, are limited partnerships. The key differences between a Limited Partnership and LLCs and C corporations are around liabilities. In the limited partnership, the investors have limited liability (like a LLC or C corporation) but the managers (called General Partners) do not. Limited Partnerships are set up to take in outside investment and split ownership. And they are flow through entities.

There are many other forms of corporate ownership but these three are among the most common and show how the three big issues of liability, ownership, and taxes are handled differently in each.

The important thing to remember about all of this is that if you are starting a business, you should create a corporate entity to manage the risk and protect you and your family from it. You should start with something simple and evolve it as the business needs grow and develop.

As an investor, you should make sure you know what kind of corporation you are investing in, you should know what kind of liability you are exposing yourself to, and what the tax obligations will be as a result.

And most of all, get a good lawyer and tax advisor. Though they are expensive, over time the best ones are worth their weight in gold.

#MBA Mondays

Comments (Archived):

  1. Richard

    Liability is an issue often overlooked by a startups’ founders, mostly due to their lack of understanding ( ignorance ) of many of the regulations governing the revenue/business model. One in particular is the so-called “auto renewal” revenue model. There are literally thousands of companies abusing their customers and ignoring this type of consumer protection regulation.

    1. awaldstein

      Smart.Creating an LLC protects us personally from the liabilities that our companies can be targeted with.Insurance for the LLC to protect them and provide some capital to fight back against liabilities is really a good idea. For my food startup and huge must.

      1. Richard

        Yep, playing without a multimillion dollar insurance policy in the food and beverage space is risky.

        1. awaldstein

          And here is one you know well.Potential (big name account) wants to sign on board but guarantees are less than their corp requirements for their vendor’s liabilities.

    2. Aaron Klein

      I’m sorry, I must have missed something. How exactly are consumers abused by being able to pay a smaller amount for a product, but pay it over time in once a month billing?The entire SaaS market is built on this principle and it’s the opposite of abuse.

      1. PhilipSugar

        He has a point, but its not really related to incorporating, unless you are saying that you plan to do something wrong and hide behind the corporation.There are a ton of rules around auto-renewing:…I have seen a ton of abuse, but frankly it seems the bigger the company the worse the offender. D&B is the absolute worst and just a total scam. (we will give your business a bad rating unless you pay us $70/month) Any company that relies on D&B reports is a fool.There was another company where you “signed up for a rebate” at a site like Fandango and then they enrolled you into a “savings” program at $10/month. Free credit report is also a brutal abuser.This goes back to if you are doing something and you can’t explain it in Caps on your website, you know you are doing something wrong. It does amaze me more Attorney Generals don’t go after this stuff.But no just having a subscription service is great for both parties instead of paying a big chunk of money upfront.

        1. Aaron Klein

          Deceit is a nonstarter. If a consumer doesn’t know what they’re signing up for, you don’t have a customer, you have a victim.But auto renewing subscriptions are not, on their face, abusive to customers.

          1. Richard

            If you have a great product all payments should be opt-in, particularly with services like twillio and and the like.

          2. Aaron Klein

            My customers do not want to re-signup for my product every month. It’s annoying as hell.They sign up, we charge them monthly and email them an invoice. They cancel any time they want. All it takes is an email or phone call.And guess what — every service I use does the same thing and I love them for it. HipChat, Google Apps, OnSIP, etc.

          3. PhilipSugar

            No this is very, very different. Email them an invoice = you are in the clear.Try and hide it….another story.

          4. Aaron Klein


          5. Richard

            Great that you provide this email. But if you feel so strongly about the value of your service, why not leave it up to the customer to opt-in for auto payment? And Im not referring to the sleazy enroll for a free month which converted will then convert to a monthly renewal.

          6. Aaron Klein

            Your premise is false. Of course they opt in. 100% of them opt in when they sign up. It says $499/month. Enter your credit card number.Just the same way I opted in to HipChat and Google Apps and a boatload of other services I use.(By the way, Google doesn’t even email me a receipt, which I find annoying. I love that they auto charge me so I don’t have to remember to pay another bill, but I have to log in and download a receipt.)I think you meant to attack how some companies trick consumers into signing up for something and there’s an automatic payment in the fine print, or something like that. That’s not sleazy — it’s quite simply FRAUD and should be treated as such.Companies who allow their customers to intentionally sign up for auto-renewing payments do not fit in that category.

          7. CanaSh

            would be interested in hearing from the customers rather than the ceo. since no customers spoke up, i’m left to think….

        2. LE

          “Any company that relies on D&B reports is a fool.”Back in the day used to use this all the time with great results. You could always smell by the total report the legitimacy of the company (combine with other data). We used a dial up modem (the 80’s) and when a lead called on the phone in real time we would access d&b data to see how large of a catch it was while they were on the phone. Worked very well we knew how hard to suck up. Haven’t used them (or needed this) in quite some time (don’t extend credit).

          1. Aaron Klein

            Well, it was clear that they were willing to spend money on their business, though their judgment on the best things to spend money on was perhaps unclear. 😉

      2. Richard

        Are you kidding me? This crap has been going on for years. Just google (or duck duck go) all the work and time that state attorneys spend cracking down on this. Shame on you for defending it.

        1. Aaron Klein

          I think we may be talking about two different things.

    3. ShanaC

      oddly enough, I expect my credit card company to take care of that issue

      1. PhilipSugar

        You know except for American Express I have had a really bad time disputing charges.Its actually the main reason I keep the card. I know merchants hate it but they are really good on disputes.Everybody else……not so much.

        1. Aaron Klein

          Very true. I always use the AmEx for any company I’m remotely worried about.

        2. ShanaC

          I’m weird, I still use mostly debit cards

          1. Aaron Klein

            I never use a debit card. I feel like I’m throwing away perfectly good air miles or hotel points.A week in Hawaii in 2011 and another in Italy in 2013 for $100 apiece will get you addicted to earning those miles and points… 🙂

      2. Richard

        A credit card company’s business model is to increase not decrease transactions. Receive a “protect your credit report”off from with your statement? Or in an email? Most are offered by 3rd parties at the rate of, you guessed it, free for a month, followed by $XX.99. Think people check their statements? Think again.

        1. ShanaC

          also a reason why I am a huge fan of mint

          1. Aaron Klein

            And BillGuard!

  2. Scott Barnett

    It’s so easy to setup an LLC or S Corp, there’s pretty much no reason not to, even if you don’t know where the idea is going. An LLC runs 50 bucks/yr to maintain. I don’t know if this has changed, but one huge benefit of an S Corp over an LLC is the conversion process from these “flow through” businesses to a C Corp. Converting an LLC to a C Corp (which we did in 2007) was very painful. Converting an S Corp to a C Corp (which I haven’t done yet, but my current venture is an S Corp and I’m hoping I have that opportunity!) I’ve been told is much easier/cheaper. So, if you think you’ll ever want to get above 100 investors (if you’re planning on taking on venture then the answer here is almost always yes), I’d vote for an S Corp over an LLC. A little more expensive to maintain ($500/yr vs. $50/yr) but you’ll save thousands of dollars and months of time converting later.

    1. Aaron Klein

      Good point. Depends on the state – California is $800/year for corps, LLCs and registering out of state corporate entities. 🙂

      1. Scott Barnett

        Aaron – thanks for that…. being a bit provincial today, but I have good reason :-)My numbers are based on NJ.

  3. awaldstein

    Fred–post idea.1099 and W2s. This is a snarl of misinformation and litigation waiting to happen.Love to see a guest post from a lawyer/tax attorney who can put some logic on this for the community.

    1. fredwilson

      good ideathanks!

      1. William Mougayar

        Check out Joe Wallin, he’d be perfect at this & he has a regular blog. Very friendly guy. get 3 lawyers to write each their perspective. That way, we get a rounded view. Lawyers don’t always agree on the same thing, so it’s good for the entrepreneur to see diverse thinking in the open. (There’s a 3rd option- c-to-c btw too)

    2. ShanaC

      yes about 1099s. Oh god, freelancing can be a nightmare

      1. awaldstein

        This is a big ugly topic and honestly misinformation abounds.The net of it is that if you want someone to work on a schedule at a place or not, its a W2. Or so I think!

    3. Joe Wallin

      Arnold, you mean improper classification of employees as independent contractors?

      1. awaldstein

        Hi Joe.Some people are contractors–design a logo, work on your website. Some small, some big and long-term.Some people just do stuff for you on a weekly basis, no hours specified buy hours are what they bill by.Some people show up somewhere to do certain stuff regularly over time.How do you classify these three types? What is necessary? What are penalties? And how do you fix it once you know you are wrong?Glad you asked I bet?

          1. awaldstein

            This is a good start but I’m still left with a number of Qs. This gets really messy in the food biz and one of my projects is in that are.

    4. James Ferguson @kWIQly

      The international context is also hoary – As an example in UK – we just had to show < 50% revenues would be derived from one (very big) client to win the business.Why? – because in the UK under TUPE ” Transfer of Undertakings (Protection of Employment) Regulations.” If a client cancels a contract and we were more than 50% employed by them (as a company) – we could demand full employee rights (in a place where they never heard of hire and fire)!

  4. ZekeV

    A few observations from the trenches… One, LLCs are not simple for many first-time founders to grasp, which is why I do not encourage green founders to use this form. LLCs are FLEXIBLE but not simple by any measure. This is mainly due to the elegant complexity of partnership taxation — the most notoriously complicated area of tax law. Second, the need to sign an operating agreement often imposes a time delay when adding stakeholders to the company, b/c they often feel the need to read and negotiate all the economics and control features in the operating agreement (even though they would accept the same default terms imposed by law when joining a corporation, without a second thought). Third quibble, corporations do NOT allow for more sophisticated features. In fact, LLCs allow you to do anything that you could do in a corporation (including electing to be taxed as a corporation, or under subchapter ‘s’) and in addition offer greater flexibility on tax structure and governance. The reason that corporations are preferred by many investors (aside from the default tax treatment, which can be elected by an LLC in any event) is that most of the economics, tax, and governance features are set by default, and do not require an additional written agreement with the stockholders, or affirmative election to be taxed as a corporation. Finally, s-corps are not simpler than c-corps. They are the same entity, except that in an s-corp the company makes an election to be taxed as such (which election can be voided if there are more than 100 stockholders, or non-US-resident stockholders, or an entity stockholder, or multiple classes of stock).

    1. frankhwhite

      If you treat an LLC as an S corp, do you lose the ability to vary the voting rights and economics among investors? My understanding is that S corps cannot have multiple classes of stock with differences like those that are common with common and preferred stock.

      1. Joe Wallin

        S corps can only have 1 class of stock for economic purposes. But an S corp can have voting and non-voting stock. http://www.startuplawblog.c…The fact that the S corp is an LLC for state law purposes doesn’t change this analysis…

      2. ZekeV

        I would word it the other way around. If you have an LLC that has elected to be taxed as a corporation, and for which an ‘s’ election has been made, varying the economics and voting rights would violate the ‘s’ election.

  5. jason wright

    limiting liability is essential. ‘essen’ means ‘food’ in German. you don’t want to starve to is important to remember that in many jurisdictions commercial courts do have the power to strip away the liability shield if there has been bad faith or criminal behavior by the founders, who must take their legal responsibilities very seriously at all times. having a good lawyer and insurance cover may not save you.

    1. Richard

      piercing the corporate veil.

      1. jason wright

        gossamar for the unaware

    2. Aaron Klein

      Or if you don’t have regular board meetings.It’s important to remember that shielding liability is something the government wants to do only where it wouldn’t be fair to put the company’s liabilities on an individual.If it becomes clear that the main reason you incorporated was liability protection, a judge will pierce that corporate shield really fast.

      1. jason wright

        what should be the main reason?

        1. Aaron Klein

          Think about it this way: business is high risk. There are a lot of businesses that could never form and attract capital if the individuals involved had to personally take on the risk.The government has decided to allow corporate entities to have limited liability in order to reduce those risks a tad and help those businesses get started that might not otherwise do so.So if you are a solo entrepreneur with no investors, no board and nobody else owning the company…it begins to look like the only reason you incorporated was to shield liability and you’re actually just an individual hiding behind a corporation.Some judges will still uphold that corporate shield, but many will pierce it and allow individual liability to be assessed.

  6. pointsnfigures

    have had a massive debate over C Corp vs LLC over time. There are people I know that are adamant about an LLC. They say the tax advantages on buyout are better. However, at Hyde Park Angels we make any invested company convert to a C Corp for a couple of reasons. One, they are “getting ready” for venture money-two, the angels don’t want a litany of K-1s and the liability of potentially filing taxes in every single state.Important to do one or the other-and your point on getting a lawyer that understands VC and taxes is critical. It cannot be emphasized enough. Many lawyers are hungry for business and jumping into the VC world. If they don’t have a lot of experience, they make mistakes. For some reason, it never costs them…….I have seen poor lawyering screw up and almost kill a company.

    1. Aaron Klein

      I was advised that the other reason to go corp (S until investors, C after) was that it was way easier to do employee options.We’ve been C corp from the beginning. You’re either coming to play or not.

      1. pointsnfigures

        It is easier, but there are advantages to being an LLC early-ease and cost of setup for example. I am not a lawyer or tax guy, but would probably favor LLC over S corp at pre-seed stage due to flexibility.

        1. Aaron Klein

          That is true in Delaware.

      2. Joe Wallin

        Aaron, it is true. Equity comp is much easier in corporations than it is in LLCs.

        1. Aaron Klein

          Thanks, Joe. I’ve enjoyed your blog from time to time — thanks for writing it!

          1. Joe Wallin

            Thank you for saying so!

  7. mikenolan99

    Last week I attended a White House “Investing in Manufacturing Partnership” listening session in Minnesota. Folks from the SBA, USDA and Federal Economic Development talked about how to encourage Manufacturing.I try not to get too involved with economic development – I like helping one business at a time. And, I’m not a fan of “smokestack” chasing – trying to lure big companies into town A rather than town B. I’m sure it works, sometimes – but am positive that creating an ecosystem that supports entrepreneurs is a better strategy.The conversation turned to funding. One challenge I brought up is funding growth in working capital. Lenders are adverse to lending against A/Rs, inventories and work in progress – but a fast growing company with a long operating cycle can’t support growth in working capital with earnings alone.It is a tricky problem – most companies are caught by surprise. Everything is rocking, sales keep growing, profits keep on coming, but all the cash gets used up.This is a great opportunity for Private Equity – especially patient money. A capital injection can produce great rewards for both the entrepreneur and the investors.

    1. pointsnfigures

      PE guys don’t like to take risk.

  8. John Best

    I remember reading about incorporation, types of legal entities, accounting practices etc. when I considered starting something myself. It was incredibly intimidating, so I turned to a friend who is running her own business. She simply said: “Don’t worry, there are people that will know this stuff for you.”Worth their weight in gold indeed.

  9. TWIST

    I would suggest the person talk to a lawyer with start up experience rather than take advice straight from a blog.There are a bunch of things to consider (like what state to incorporate in), and you only want to do this once. would be a good place to start.

    1. Aaron Klein

      You should really change your avatar to say “Mr. Walker.”

      1. Donna Brewington White

        Yeah, we like our blatant self-promotion to be blatant around here.

        1. Aaron Klein


        2. awaldstein

          Without smart self promotion we would miss much of what we need to find.It’s simply doing it at the right time in the right way. I’m a big fan of selling what I do well.

          1. Aaron Klein


          2. Donna Brewington White

            And I’ll cheer you on.

        3. Not Scott Walker (aka TWIST)

          I am not Scott Walker.I am just a) a big fan of the services he offers (and his business model), and b) find it incredibly ironic that an important legal question came up after Saturday’s discussion on “stupid ads” in a professionally produced podcast that help entrepreneurs connect with a good lawyer. But I digress.I have been an avid AVC reader for 7 years, and love the work that Fred does. However, in this case, I think his advice is too simplistic. I really encourage folks to work with a good lawyer with start up experience. VC preferences are important, but they are simply one of many more important factors one should consider.A good reference (written by lawyers) can be found in Section 6 of “Do More Faster”.…PS – I am also not Brad Feld.

          1. ShanaC

            cool by us, but you should come back more. What makes you dislike his advice

          2. Donna Brewington White

            Touché… and thanks for the clarification.

  10. Joe Wallin

    Great post Fred. I’ve written a bunch of on choice of entity at startuplawblog. You might like this piece: http://www.startuplawblog.c

  11. JLM

    .One of the most important things one will ever learn about whatever legal organization one embraces is that you must “live” that legal form.If you choose to be a C corporation, then you must observe all of the corporate governance niceties of that legal form and in the state in which you are registered.A CEO should become intimately familiar with Articles of Incorporation, ByLaws and other foundation documents which require certain specific and precise actions to be able to enjoy the benefits and protections of certain legal structures.This is very serious business and if one fails to adhere to these corporate niceties, you could come to a very bad end.If anything were ever to go wrong, your detractors will simply say that the corporation is the alter ego of the founders and is not really a substantive legal organization — in effect, “piercing” the corporate veil to get at you personally.It does not take much to drive into the ditch on this.As an example — fund your initial growth with personal credit cards and you have “commingled personal and business funds and assets” thereby providing ammunition to be used in a piercing argument.If you do it right initially, it is easy to maintain your corporate structure and protocols and not be subject to such a fate.I once litigated for almost 5 years with a state regulatory agency on just this subject and our corporate formalities carried the day. It takes about 4 hours per year to do it right.JLM.

    1. PhilipSugar

      So right. Just like accounting. Doing it right is not very hard if you do it every month/year.Going back and fixing is a bitch.

    2. LE

      “thereby providing ammunition to be used in a piercing argument.”Business involves all sorts of risks that are taken daily and deciding what you should spend time on, that is going to matter at some point, takes thought.if you do everything ritually correct, and don’t cut corners, you will end up with no time and no money. Everybody takes different risks of course based on either what has happened to them, what they read or what someone (say an attorney) told them.This is not to suggest that what you are saying is wrong it’s not.But just this one example this “commingled personal and business funds and assets” indicates something has gone to discovery phase where that info is even found out and case hasn’t been settled before that.When you are making estimated tax payments the accountant suggests that “if the amount is significant [send it certified mail]” so you can prove it was made on time.I actually did that for years and years wasting time at the post office to make sure that I had a certified return receipt. I finally decided many years ago that I had enough and was just going to send regular mail and if anything happened I would dig myself out of the mess afterwords and/or pay any penalty/interest.

      1. JLM

        .The formation and foundation documents of a business are always a problem when there is any kind of litigation.They are easy to get right.I have always been involved in multi-city, multi-state, multi-unit operating businesses in which the issues of domestic corporate sponsorship, state income taxes, wholly owned corporate subsidiaries and eligibility for licenses and other foundation requirements have been important issues.Many times I have had hundreds of wholly owned corporate subs for liability and insurance and licensing and capital reasons. I have often held licenses, real estate, operating unit and other distinctions separately.If you get used to that environment, it is very easy to make it all work correctly with requisite annual filings, annual meetings and other corporate formalities.I would have everything done for over 100 such subs in less than a week in the first week of each new year.I am not one in favor of cutting a corner.I once prevailed in a massive litigation because our corp docs were flawless.JLM.

        1. LE

          “Many times I have had hundreds of wholly owned corporate subs”You are a well oiled machine of compliance [1] because a) you have to be for the type of things you do and b) you are doing it enough that you have developed a system that works at the scale you are doing it. My wife didn’t backup her computer(s) (until I got involved) but I’ve had this nailed down for years because I have scale and have more to lose. (Not saying she was right for not doing it of course.)[1] I guess that’s like the difference between how the telcos keep their trucks maintained and working and how the small dry cleaner does. (Understand they have dedicated people for this and you don’t but my point is at scale many things become more practical).

  12. Guest

    Great post! On top of thinking about liability, ownership, and taxes, entrepreneurs should also be thinking about the management structure of the business and the transfer-ability of stock ownership.In a corporation, shareholders are free to transfer a corporation shareholders are free to transfer ownership interest unless agreed otherwise, versus in a LLC, members cannot transfer ownership interest without unanimous consent from all members.Here’s a summary of business structures –

  13. Mark Thompson

    Great post! On top of thinking about liability, ownership, and taxes, entrepreneurs should also be thinking about the management structure of the business and the transfer-ability of stock ownership.In a corporation, shareholders are free to transfer a corporation shareholders are free to transfer ownership interest unless agreed otherwise, versus in a LLC, members cannot transfer ownership interest without unanimous consent from all members.Here’s a summary of business structures –

  14. Brandon Burns

    What do folks think about B Corps?

    1. ShanaC

      have their own set of problems of morality. Might be better to be a c corp with clear purpose rather than have fashionable morality than may go out of fashion at some point

      1. Joe Wallin

        Shana, I think the big problem with B corps (or, if you are a fan of B corps, the big plus), is answering to a third party standard. This is not a problem with Washington State’s approach — which is flexible, and allows Boards to decide, and issue social purpose reports that talk about what they have done to promote their social purpose. You might find this interesting… http://www.startuplawblog.c

        1. ShanaC

          i’m fine with answering to third parties – I’m concerned with moral flexibility

      2. Brandon Burns

        well put

        1. ShanaC

          thank you!

    2. Joe Wallin

      If you want to take a look at something that is like a B corp, but I think better–check out Washington Social Purpose Corporations.

      1. Brandon Burns

        great link!

    3. kidmercury

      stupid, terrible, a distraction, led by people not sufficiently educated in the matters they speak of (environmentalism). the b stands for Bad.right now it is worth mocking and chuckling over, but i suspect they are setting up to ask for tax breaks. if they ask for any type of break under the misguided belief that their ideas for improving the environment are worthwhile, it will be extremely unfortunate and counterproductive.

  15. Stefan

    Fred, do you expect a long term impact of the Snowden leaks for the development of connected IT? I’m located in Germany, and many companies I spoke to in the last days rethink a lot. What’s your opinion on this?

  16. Aaron Klein

    I don’t have any aversion to the B-corp formation, but I think it’s more PR than not. Any well-run C-corp will be run for the mutual benefit of its shareholders, customers, partners, employees and any other stakeholders.

  17. LE

    Oh geez. Why not just try to start a business and make money and then worry about that stuff later when you have already become successful?Why place extra burdens on yourself from the start? (You don’t have to be orthodox to take a day of rest, who needs artificial constraints and rules?) Now if you want to provide evidence to support the point that by being a “b-corp” you will carve market share from competitors somehow I’m all ears!

  18. Aaron Klein

    You and I probably have a similar definition of “well run.”

  19. PhilipSugar

    Is this a hard learned lesson?

  20. JLM

    .The big issue on D & O insurance is the deductible.JLM.

  21. LE

    “and have you paid it?””I’m sure you don’t mean you just say “have you paid it” you mean that you personally verified that it was paid and do it every year, right?Not just when you join the board, correct? By contacting the company that receives the payment (we have people all the time trying to prove a bill has been paid to which we reply “cancelled check please including the deposit stamp on the back”). A “paid” stamp means nothing. Obviously.No need to trust, just verify.I think this is a good example of as you go along in business you pick up more and more things that can go wrong and it totally drags you down. Because the probabilities are very small that something is going to happen but since you know what can happen you become like a worried parent.

  22. JLM

    .In many states the protections afforded non-profit Boardmembers are statutory but the Feds always can get Boardmembers if the non-profit fails to pay payroll taxes.I resigned from a Board I had served on for years because they did not pay their payroll taxes on time.JLM.

  23. LE

    What’s a typical deductible? (Also at least even with a deductible you have certainty which allows you sleep at night knowing the downside risk. Not to mention someone to handle legal bills or put up a fight.)

  24. JLM

    $2MM D & O policy, $75K deductible, $50K annual cost, Delaware corpThe domicile of the corporation is an important ingredient in pricing insurance because some states — Delaware, Nevada — are very protective of corporate Board and management liability.JLM.

  25. Henry Glover

    Some policies allow for the carrier to cover the claim and at their discretion invoice you for the deductible after the claim payout. This gives companies a little more security around a higher deductible.

  26. kidmercury

    b corp is useless. their ideas for fixing the environment are misguided and they don’t have any meaningful legal distinction anyway. i’m half expecting them to lobby for tax breaks, though.

  27. LE

    To me it’s a burden!My cousin, when his father died, well, he went to synagogue every morning for yiskor service (for one year) which is held at approx. 7am and then he went to work. When he traveled he did the same having to find a synagog all over the world I know he thinks he is a better person for it. And that’s the thing. Everybody is different. He’s also kosher. I’d rather just eat what I want when I want where I want. I don’t need or want arbitrary framework. To me it’s a burden.By the way the original earthy crunchy green do gooder type company was probably Ben&Jerrys. Of course they serve a product that is loaded with all sorts of bad things that people abuse (sugar and fat) but that’s another story. But yes they do give back to the community and all of that.

  28. LE

    Interesting.I just dug up the policy for a condo board I am on and it is as follows:2mm d&o1k deductible3.8k premium

  29. Aaron Klein


  30. pointsnfigures

    there are different definitions as to what a good corporate citizen is. if you are a company, create jobs and add value, you are doing good.

  31. JLM

    .That is a more general liability policy for a real estate asset association not the type of public company D & O policy I am referring to.A public company would also have a general liability policy much of which would be tantamount to the professional liability policy you describe.JLM.

  32. Henry Glover

    because of the 3 year term endorsement that is probably a 3 year premium so divide by 3 to get the annual premium… although I am not familiar with New Jersey policies so you might want to check the term dates

  33. Henry Glover

    Not a huge deal to this discussion but I will point out general liability, professional liability and D&O insurance are three completely different types of coverage and are normally covered under 3 separate policies. Seeing the most recent payment might not provide evidence to coverage as there are different terms in policies such as retro date date and effective date.D&O and GL are more important to a condo association but the professional (errors and omission) is usually more important to a startup.As with any insurance policy there are certain elements that have to be self insured. Intellectual property and patent violation is one example. ..