Every entity is not a Delaware C Corporation

I hear lots of folks saying "Delaware C Corp" in answer to the form of entity appropriate for investment. Of course I am not a tax professional or a lawyer, so I do not give advice in this arena without that warning and telling you to check with yours before making any decisions.

A little knowledge is a dangerous thing. You are warned, I am not the greatest expert in these areas. But in my experience, there are reasons people end up investing in entities that are not Delaware C Corporations. Here are some of them:

There are likely many other reasons, but you get the idea. And of course there are lots of answers from investors about why you should not do these things (LLC / S-Corp / other).

Taxes get complicated

I am currently an investor in quite a few companies that are not DE C-Corps. I get Schedule K-1 paperwork from a bunch of them, and not all what you would call on time. It's July, so you figure it would be done, but I just got one last week, and several companies I have not gotten paperwork from yet. My accountant will be finishing my last year taxes soon, I hope... but really, it shouldn't take this long.

Another issue is that all these K-1 things produce more or less tax. The one I just got produced a loss of $35. That is, I will have to pay taxes on $35 less than I otherwise would have to. Of course it may cost me more than that to update my taxes to reflect this change, and I have gotten some for less than $10. Some may even produce a profit, but then I have to pay taxes even if I never got the draw from the company. And if each is in a different state or country, I end up having to do paperwork for another state. The last one was from Rhode Island. These are examples of why many investors want as few states involved and only C corporations.

Of course taxes and all the other things associated with a C corporation are a burden for a small startup barely getting going. So I can hardly blame them for doing it their way. And I run only LLCs and S corporations on a cash basis these days because it reduces my paperwork and retains the liability protection, is less expensive to operate, and is simpler from a tax standpoint.

Don't change it before coming to me for help

The worst thing that happens is when startups decide that, before they engage in my advisory services, they will change the form of their entity.

In any case, you should see by now that the decision is often better mad after you figure out the rest of the internal diligence process and not as a precondition of starting the process.

In summary

I don't want to beat a dead horse here. Whatever you have now, if you are coming to A2E for advice about what to do next, don't make changes just before you start working with us. It will likely cost you more, have to be changed again, and take more time to get through the diligence process.

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