Startup Law 101 Series – Which Entity Is Best for Your Startup

Which entity is best for your startup?

It depends.

If you are a solo founder working out of a garage, you normally don’t need an entity at that stage. Save your legal dollars and concentrate on development.

What if you are a solo founder out interacting with the world, trying to set up deals and relationships for your venture? In that case, do consider forming an entity. It will give you limited-liability protection. It will give you a new level of credibility in dealing with third parties. You are a good candidate for an LLC. The single-member LLC is as simple as can be to set up and administer. Indeed, a single-member LLC might be viewed as essentially like a traditional sole proprietorship with a limited liability cap on it. The law has given it as a gift to modern proprietors who can now do what they have always done but with no special legal formalities to contend with. You won’t have any special tax complications either. LLCs are tax-pass-through entities, meaning that you will pay no tax at the entity level but will be taxed instead at the individual level for any profits made by your company. For tax purposes, you will be treated as a self-employed individual and will pay all the normal FICA and other taxes just as a sole proprietor would.