I came across this article over at the all things venture capital hub, VentureBeat. In my usual wordiness I couldn’t have said it much better. To paraphrase it boils down to 3 simple points 1) Keep it Simple; 2) Choose Your Entity Wisely; and 3) Wait Until the Right Time to Create an Entity.
In particular to my world I found the following most pertinent:
If you are planning on raising professional capital, whether from an angel group or from a venture capital firm, use a Subchapter C corporation incorporated in the state of Delaware.
LLCs simply do not work. Investors categorically will not put money into an entity that will require them to file annual federal and state tax returns to reflect the pass-through of operating gains and losses (as LLC’s do).
Subchapter S corporations are also a poor choice if the fundraising process is likely to begin in the first year. Sub S companies are viable only with investors who are “natural persons” (which automatically is a problem with VC firms and most angel groups) and only where there is a single class of stock (i.e., not preferred stock, which is typically the class of stock given out to angels and VCs).
A Delaware corporation is the preferred choice among states to choose from—most law firms will recommend this for a number of reasons, not the least of which it will save you the expense of reincorporating to Delaware in the event you are successful enough to consider an IPO in some distant future. (Fun fact: some 70 percent of the US publicly held companies today are incorporated in Delaware.)
Although, I disagree with Delaware as being the end all be all of corporate creation, the points are spot on for anyone considering seeking out funding. As for Delaware, just know that it is the beneficiary of a perpetual myth that anybody that is anybody incorporates in Delaware. Not all states are equal in their corporate laws, but their are plenty to choose from. If you are not looking at funding in your immediate future, incorporating in a different state is just added headache. Focus on getting your business up and running and presentable. If you have a good company, the state of incorporation is not going to scare off potential investors.