Being an entrepreneur (that’s what they’re calling me nowadays) is akin to the do-it-yourself major in college: you take the classes that you want to take, then wrap them up in a package you call your “major.” You can usually tell the made-up ones from the authentic by how complicated their names are: “Philosophy of Mathematics” is probably a do-it-yourself-er while “Physics” is clearly accredited (ironically, my undergraduate major at the University of California at San Diego was entitled “Interdisciplinary Computing in the Arts” and I didn’t make it up). The good thing about the do-it-yourself major is that you aren’t pigeonholed into learning or thinking a certain way: if you don’t like the “compilers” course you are taking this semester, you don’t have to take the next-in-the-series the following semester. Entrepreneurship is the same: for lack of a better word, it’s an “organic” process.
A few posts ago (in “Confusion, Incorporated.“), I mentioned that I was trying to decide between setting up TripTie as either an S Corporation or an LLC. So what do I go and do? Of course, I file for C Corporation status. Like I said, it’s an organic process. Simply put, after doing further research, I found that the C Corporation was the best structure for my business. That’s not to say that the information in my previous post was wrong; what was wrong was that I discounted the C Corp structure a bit to early on in my decision-making process. Perhaps I had a somewhat biased view going into the whole thing.
I picked the C Corporation structure for numerous reasons:
1. I like the idea of shares and giving out shares to partners and employees as incentive.
2. If you are looking for funding (which I may pursue at some point), the C Corporation structure is the most investor-friendly. You can have different classes of shares and give “preferred” shares to your investors (you can’t do this with an S Corp).
3. Of course, you could mimic this structure in an LLC, but then you would have to draft lengthy by-laws with advice from a lawyer. I would rather use the structure inherent in a C Corporation.
4. In terms of double taxation (one of the reasons why most people choose an S Corporation or an LLC over the C Corporation), I did my research and there is a way around this for small corporations (or when you are just starting out): pay out all of your profits as salaries to yourself and your employees. You would do this anyways in an S Corporation or LLC. Here’s a snippet from my NOLO book (an invaluable resource, by the way) regarding double taxation in a C Corp structure:
“…double taxation seldom occurs in the context of the small business corporation. The reason is simple: Employee-owners don’t pay themselves dividends. Instead, the shareholders, who usually work for their corporation, pay themselves salaries and bonuses, which are deducted from the profits of the coporate business as ordinary and necessary business expenses. The result is that profits paid out in salary and other forms of employee compensation to the owner-employees of a small corporation are taxed only once, at the individual level.”
TripTie will soon be TripTie, Inc.
Lesson-learned: in entrepreneurship, your only confines are the ones you create for yourself. If you get tangled in a tango, just tango on.
August 29th, 2005 at 3:25 pm
Interesting points, Andrew. You will be trip tie’s unofficial legal counsel before you know it! One question re: double taxation - Have you thought about how to deal with the issue when your company grows? Preferred/common shares are also a bit tricky.
But hooray to independent majors! I wished I constructed my own.
But my University, too, had some pretty wacky sanctioned ones, like “Political Economy of Industrialized Societies”. I never quite figured out what that encompassed (and I couldn’t figure out how I would ever explain it to someone else), so I didn’t major in it.
Tango on!
August 29th, 2005 at 3:29 pm
PS - I meant “TripTie, Inc.’s” and not “trip tie’s”.
August 31st, 2005 at 7:22 am
Clarice - Well, at some point, if the corporation becomes large, then it becomes a beast of its own - it makes and stores money, and that money is fed back into the business as expenses. So what I am trying to say is that I think double taxation is really a startup business quandry (where money should flow through to the owners in a startup stage). Perhaps it’s a slight flaw in the C Corporate structure (which is perhaps why you can elect S Corp status). However for my goals, I’m willing to go through a bit more careful planning and paperwork.