Questions

What is the best business structure for a tech company?

I have an LLC formed that I was planning on using as an umbrella corp for a few different business ideas, a couple of them are in the tech industry, and one is already started and is just a DBA. Would it be best to set each company up as it's own entity even if they all have the same team as my umbrella corp?

4answers

It depends :)

Financing:
When you're ready to start raising funds, C Corps (especially Delaware) are still preferred in the VC world although some angels are increasingly willing to invest in LLCs.

Risk:
When you're just starting off it's okay to have a holding LLC with DBAs. As you grow one or more of the ideas, you may want to separate out the risk so that if one company has issues it doesn't hurt the others. But it isn't necessary when you're early on. Once you add employees, cofounders, and/or investors, it's probably time. Your holding LLC could have equity in the idea and you could setup the idea as a C Corp. It's a good structure.

Also -- this ain't legal advice. Just general blahblahblah about legal structure.

Really good article from a fellow Seattle startup attorney here: http://www.startuplawblog.com/choice-of-entity/


Answered 5 years ago

This is a question I get frequently: Should I set up a new legal entity for each business I start.

When entrepreneurs are just starting or want to test a few ideas, they often group businesses under the same entity (or use a series LLC).

As soon as you can afford it (or if you have the money to start it correctly) you definitely want to have them each business in it's own legal entity.

This is primarily because of liability, financing and accounting reasons.

Liability
You want to maintain a proper corporate veil, distinct assets and liabilities.

Financing / M&A
Selling a company (moving assets, everything including domain, software, paypal, emails, etc.) is a mess if it is co-mingled with another business.

Accounting
Generally much easier if separate bank accounts, merchant accounts etc. This includes tax reasons but any sort of due diligence or audit will also be more difficult.

Partnership
Much easier to cut a deal with joint venture profit share or equity partnership if you can simply amend operating agreement or create a shareholders agreement and offer membership interest or shares to new person - without worrying about separating out other assets held by that same legal entity.

TL;DR : Generally better to have a separate and distinct legal entity for each business.


Answered 5 years ago

You could do a Series LLC which would allow you to set up multiple ventures while compartmentalizing the liability and risk.


Answered 5 years ago

Frankly if you don't have proof of concept you should incubate them all under the same legal entity. As you start to generate profit, raise money, etc. then you can look at creating a legal entity but the only people who benefit from the attitude that starting a company starts with forming a legal entity are the lawyers and accounts who get more work from the process. I've owned and operated 13 businesses in my day and had all kinds of other ideas I played with. So often I'd have an idea sitting maybe I'd have some meetings about it etc. but it would never go anywhere or would get pushed to the back. If I'd formed a company for each of these I would have wasted a ton of time and money. Start with market validation and get some customers first then create legal entities as they become something real.


Answered 4 years ago

Unlock Startups Unlimited

Access 20,000+ Startup Experts, 650+ masterclass videos, 1,000+ in-depth guides, and all the software tools you need to launch and grow quickly.

Already a member? Sign in

Copyright © 2020 Startups.com LLC. All rights reserved.