By Sarah Heck, Head of Entrepreneurship, Stripe
Starting a business is hard. The early decisions that founders make when forming their company are often riddled with questions and doubt. Many people don’t know where to start or what path to take, and the seemingly endless list of tasks necessary to transition from having an idea to engaging the first customer can start to feel like one hurdle after the next. So they stop.
HelloAlice and Stripe Atlas have teamed up to make it as easy as possible for new ventures to get off the ground. Together, we’ll help decode the process and lower the barriers to launching a business, starting with the very first step: establishing a legal business entity.
There are two popular corporate entities in the United States: the Limited Liability Company (LLC) and the C Corporation. Each entity type has some features that are more advantageous for some businesses than for others, so it’s important to understand the nuances of both options before signing any dotted lines. Both entities are intended to limit liability for founders — liability for the debts and obligations of the business can move from the founders to the company itself.
LLCs are used by many small teams, bootstrapped businesses and side projects seeking a more flexible start. C Corporations, on the other hand, are the entity of choice for many investor-backed technology companies, but they’re not for everyone. So, what’s the right choice for your business? We’ve gathered the need-to-know information to help you make an informed choice (in consultation with your professional advisors, of course).
LLCs
A LLC is a type of company organized under contract between the owners (called “members”) — often called an “Operating Agreement”. It outlines how the business will be run and how the financial burdens and returns will be divided between the owners.
LLCs can be structured in myriad different ways. LLCs are not subject to the same formalities as C Corporations, so many major business decisions can be made with fewer formalities, sometimes without any prior written approval. This makes them flexible, but you must dig into the paperwork to understand how each LLC is governed. LLCs offer pass-through taxation, so owners generally pay personal income tax on the revenue of the business.
C Corporations
Google, Rent the Runway, EventBrite, and many other household names are C Corporations. They are owned by shareholders, including investors who may not be employees of the company. This is one intention of a C Corporation: create a legal distinction between those who operate the business and those who own the business. Owners can purchase shares, which are a defined portion of their financial stake in the company, and issue stock to employees.
C Corporations have a more standardized structure, sharing commonalities like stock to represent ownership, governance and decision making by a board of directors and day-to-day operations that are handled by officers.
You may have heard that lots of companies incorporate in Delaware, and that’s for a number of reasons. Delaware offers corporations clear rules, as well as relative ease in raising money from global investors. Delaware is also the only state to have a separate business court system (the Court of Chancery), which means there is a long-established body of laws relevant to corporations that has been tested in the Delaware courts over many years.
Lastly, unlike LLCs, C Corporations must pay corporate taxes, and their shareholders are taxed separately if the company pays distributions to them.
Startups are iterative by nature. However, decisions around the legal infrastructure of your business aren’t, and it can be hard to predict upfront if your promising idea will become a lucrative side hustle or the Next Big Thing. So, at Stripe, we want to give founders more options to get started.
Business owners who are registered on Alice now have an invitation to access Stripe Atlas — a tool that enables entrepreneurs to form an LLC or a C Corp, open a business bank account and access all the tools you need to get started, just in a matter of days.
Ostensibly small things can become significant barriers in the formative stages of a new business. Together with Alice, we hope to provide more founders with a well-lit path.
If you’re curious to learn more about IP, taxation, ownership, and investment for LLCs and C Corporations, explore Stripe’s guides here.
And for more resources to help you launch your business, get started on Alice for free at helloalice.com.