Straight talk is something that can help a founder of a startup. We cannot give tax advice, like a certified professional can, but we can share a lesson that we have collectively learned over the years about what legal structure to pick for your company, as you are weighing the different tax options of the different legal entities (C Corp, S Corp, LLC, etc).
Here is our straight talk lesson about tax considerations:
People choose LLCs for tax reasons (protection of a corporation, but the tax benefits of a partnership), but if you’re serious about building your company, you use a C-Corp. This is what we have learned about what it takes to be serious. It’s your decision.
You can pay yourself a salary out of a C-Corp and, if you retain any earnings if its cash positive, it will be taxed at 21% corporate rate. If it passes through to the individual, the rate might be higher or lower depending on your personal rate.
Smart startup founders make a C-Corp, regardless of minor tax benefits of an LLC or an S Corp, unless you are making a small business, as opposed to a startup. (A small business is intended to provide a living to one or a few people at a sustainable rate, but a startup is intended to grow fast, burn cash and have an exit strategy to make money for the investors.) Save yourself time!
Also, remember that investors (angels and VCs) prefer C Corps registered in Delaware. Sometimes the most profound wisdom is the simplest. It’s just a matter of doing it (of course, with the help of a lawyer and/or experienced professional).