One of the first decisions a founder of a startup will make is the form of the entity. For technology startups, the decision is usually between a limited liability company (LLC) and a corporation.
Hashbrown has decided to incorporate as a corporation. Most technology companies are structured as corporations.
Investors of technology companies are more familiar and comfortable with corporations than LLCs. In fact, many investors will force a technology startup structured as an LLC to convert into a corporation before they put money in. There are at least two good reasons for this:
1. Predictability of corporate governance. There is a predictability of corporate governance in a corporation that isn’t necessarily true in LLCs. The governance of a corporation and how a corporation should function is set forth in the corporate codes. The general structure and process is laid out in the law books. On the other hand, an LLC’s governance is generally set forth in
an operating agreement. An operating agreement is essentially a contract. It can vary tremendously and there is a lot of room for people to get creative.
2. Venture Capital funds cannot invest in LLCs. For tax reasons, most venture funds are precluded by their pension fund and other tax-exempt limited partners from investing in a pass-through tax entities such as an S corporation, a limited partnership, a general partnership or an LLC.
So, Hashbrown will be “Hashbrown, Inc.” – structured as a corporation.
Board Members will be Moe, Curly and Larry.
The capitalization table will be as follows:
Moe with 1,000,000 shares of common stock.
Curly with 1,000,000 shares of common stock.
Larry with 1,000,000 shares of common stock.
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