Paralegal Certification PrepContracts and Business LawEasy
A client is seeking to incorporate a new technology startup. The client wants to attract venture capital funding, offer stock options to employees, and shield personal assets from business liabilities. They are not concerned about double taxation at this initial stage. Which business organization structure is most appropriate?
- AC Corporation
- BLimited Liability Partnership (LLP)
- CSole Proprietorship
- DGeneral Partnership
Show answer & explanationAnswer & explanation
Correct answer: A. C Corporation
A C Corporation is the most suitable structure for attracting venture capital and offering stock options because it allows for multiple classes of stock and is the standard structure for large-scale investment. It also provides limited liability to shareholders. While it faces double taxation, the client indicated this is not a concern at this stage.
Why the other options are wrong
- B. An LLP provides limited liability for partners but is not typically structured to attract venture capital through stock issuance.
- C. A sole proprietorship offers no liability protection and cannot issue stock.
- D. A general partnership offers no liability protection and is unsuitable for attracting venture capital or issuing stock.
C Corporation
A legal entity separate from its owners, providing limited liability to shareholders and allowing for extensive capital raising through the sale of stock. Profits are taxed at the corporate level and again when distributed as dividends (double taxation).
- Limited liability for shareholders.
- Ability to raise capital through stock issuance.
- Formalities required (bylaws, board meetings).
- Subject to double taxation (corporate and shareholder level).
Memory trick: Growing your biz? 'C'hoose 'C'arefully for 'C'apital.