What Corporate Structure Means for Your Business

There are a couple of caveats. First, the organizational documents for any particular entity can modify these general rules. For example, technology startups often organize as LLCs but use a corporate management style.

Governing jurisdiction

The place of incorporation is the source of law for forming your type of entity. A corporation in California uses California law, an LLC in New York uses New York law, and so on. While there are many commonalities, each jurisdiction may impose limits on both internal and external corporate structure.

The Internal Revenue Service also creates restrictions on corporate structure. For example, under federal tax law, S Corporations cannot have more than 100 shareholders to qualify for pass-through tax status.

Type of ownership

The form of ownership traces a spectrum from the simple to the complex.

Partnerships usually convey “partnership interests” to each partner.

Limited Partnerships, including limited liability partnerships, might refer to “limited partnership interests” or “limited partnership units”.

Limited liability companies call ownership units “membership interests.” Some jurisdictions allow an almost corporate approach to units of ownership for LLCs.

Corporations can simply have “shareholders” or “stockholders”. Whether there are 2 or 2,000, the structure is simple.

Corporations can also have complex ownership structures where equity includes, classes of stock, options, warrants, and convertible debt holders.

Strategy and business objectives

Most importantly, the objectives of the business are critical to designing a corporate structure. A US corporation which wants to enter the Argentinian market will need to form an Argentinian legal entity. It will have to make choices about management and ownership under local law. Those choices will also influence the results of the business back in the US.

An LLC creates a subsidiary that it plans to take public. Initial Public Offerings (IPOs) are typically accomplished by selling stock in corporations. The parent LLC forms the new entity as a C corporation.

Conclusion

Corporate structuring can enhance the value of any business. It is important to consider the legal form, the governing jurisdictions, type of ownership, and business objectives. The best way to handle this complexity is with entity management software.

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