WEBVTT

00:00:04.466 --> 00:00:06.133
When you're running a business,

00:00:06.133 --> 00:00:07.733
it's all-consuming.

00:00:07.733 --> 00:00:10.633
You're focused on your customers and employees.

00:00:10.633 --> 00:00:13.100
You might need help managing the bigger picture.

00:00:13.100 --> 00:00:17.266
Should I form an LLC or a corporation?

00:00:17.266 --> 00:00:19.033
When should I think about selling?

00:00:19.033 --> 00:00:21.500
And what steps should I take?

00:00:21.500 --> 00:00:24.666
I asked tax partner Neil Balmert at DLA Piper

00:00:24.666 --> 00:00:26.100
some of the most common questions

00:00:26.100 --> 00:00:27.633
I hear from business owners,

00:00:27.633 --> 00:00:30.966
starting with the question I hear the most.

00:00:30.966 --> 00:00:32.666
What type of entity,

00:00:32.666 --> 00:00:35.533
corporation or LLC partnership,

00:00:35.533 --> 00:00:37.766
makes the most sense for their business?

00:00:37.766 --> 00:00:41.166
I get that question a lot from startup companies.

00:00:41.166 --> 00:00:43.600
So, the liability protection of an LLC

00:00:43.600 --> 00:00:46.633
and a corporation is the same under state law.

00:00:46.633 --> 00:00:48.700
So, primarily, the choice of entity

00:00:48.700 --> 00:00:50.333
is driven by tax purposes.

00:00:52.500 --> 00:00:54.200
A limited liability company

00:00:54.200 --> 00:00:57.500
or partnership is generally a flow-through entity,

00:00:57.500 --> 00:00:59.100
and a corporation is generally

00:00:59.100 --> 00:01:02.233
not a flow-through entity.

00:01:02.233 --> 00:01:04.233
So, what that means is that if

00:01:04.233 --> 00:01:07.833
you have startup losses for the founders or investors,

00:01:07.833 --> 00:01:09.900
and you have a flow-through entity,

00:01:09.900 --> 00:01:13.066
those losses can flow through to the investors

00:01:13.066 --> 00:01:15.933
and offer some tax savings on the front end.

00:01:15.933 --> 00:01:18.566
So, if the company will generate losses,

00:01:18.566 --> 00:01:21.400
and the initial investors are individuals,

00:01:21.400 --> 00:01:23.400
we often see a flow-through entity

00:01:23.400 --> 00:01:25.066
like a limited liability company.

00:01:25.066 --> 00:01:26.766
Conversely,

00:01:26.766 --> 00:01:29.466
if we have a venture capital investor

00:01:29.466 --> 00:01:31.966
or a more sophisticated investor,

00:01:31.966 --> 00:01:34.766
they might prefer a corporation.

00:01:34.766 --> 00:01:36.633
So, oftentimes,

00:01:36.633 --> 00:01:38.800
we'll see a company start out with a flow-through

00:01:38.800 --> 00:01:41.200
like a limited liability company,

00:01:41.200 --> 00:01:44.366
run that until they do their first outside financing,

00:01:44.366 --> 00:01:45.933
and then flip that over

00:01:45.933 --> 00:01:47.866
to a corporation at the time of

00:01:47.866 --> 00:01:49.866
bringing in venture capital money.

00:01:49.866 --> 00:01:51.533
If you have questions about

00:01:51.533 --> 00:01:55.266
what's best for your business, give us a call.

00:01:55.266 --> 00:01:58.433
We know your time is precious. Let's make it count.