Choice of Entities: A Guide to Corporation Types and Joint Ventures

By Allison Hushek on January 16, 2025

You’re a founder of ideas, but you don’t know which type of entity to form for your business concept. This article will address the pros and cons of the various types of corporations. There isn’t one answer regarding entity-type. It depends on many variables, such as the location of party(ies), relationship of parties, business purpose, desired tax treatment, level of liability protection needed, administrative requirement, and attractiveness to investors. It’s important to seek out your tax professional’s advice before choosing your entity type. They have strong opinions on which entities will offer the most advantageous tax structure given your situation.

C-Corps. Start with a C-Corp analysis. VCs and some angel investors prefer investing in C-Corps, and are sometimes required by regulations to only invest in C-Corps, as opposed to LLCs or S-Corps. C-Corps can have an unlimited number of shareholders, and can issue common and preferred stocks. Preferred stockholders have advantages (e.g., yielding more than common stock and being paid out monthly or quarterly) and special rights (e.g., antidilution protection, conversion rights, liquidation preferences). Further, C-Corps do not pass-through taxes to owners, which means investors aren’t responsible for debts and obligations of the company (e.g., a tax bill).

However, C-Corps are subject to double-taxation and have stricter administrative requirements (e.g., requiring a Board of Directors (BODs)). You must have significant upfront capital and access to qualified advisors to fill a BOD. If you have the funds, and perhaps you have plans to go public quickly, your startup will likely be choosing a C-Corp. If you do not, you’ll likely be choosing between an LLC and an S-Corp. When your LLC or S-Corp becomes successful, and attracts investors beyond friends & family using safe or convertible notes, you’ll transition it to a C-Corp.

LLCs and S-Corps. If a C-Corp is not feasible, move to an LLC or S-Corp analysis. LLCs have fewer formal requirements than a corporation, including not being beholden to shareholders or BODs; they can have an unlimited number of owners; they don’t require distribution of profits to be divided equally or according to ownership percentages; they can be member-managed or manager-managed, depending on the level of interest or involvement of the owners; and members can be companies and/or individuals. However, LLC’s do not have membership interests that are freely transferrable, they are more difficult to transition to C-Corps in the future than S-Corps, and they risk not being recognized as a legal entity globally - resulting in being double-taxed like a corporation.

S-Corps may have preferable self-employment taxes compared to LLCs, can issue common stock and are easier to transition to C-Corps compared to LLCs. However, S-Corps have more formal corporation requirements than LLCs (e.g., annual meetings; BODs), are subject to a maximum of 100 shareholders, who can only be U.S. citizens or residents (not companies), and earnings are required to be distributed proportionally to capital contributions.

Tax Treatment. LLCs and S-Corps are pass-through entities, meaning owners are taxed once (e.g., corporate income is reported on the owner’s individual income tax return and taxed at the individual income tax rate). C-Corps are double taxed (e.g., first, taxed at 21% for the federal business income tax (plus state corporate taxes), and second, taxed for dividend income shareholders may receive). Though, C-Corps are not required to pay taxes on retained earnings or profits that are held for reinvestment back into the operation up to a capped amount. Consult your tax professional on paying required salaries to owners under various entity types.

Limitations of Liability. All corporation types (LLCs, S-Corps and C-Corps) offer limitations of liability, meaning they protect the personal assets of owners from lawsuits and creditors. Courts may pierce the corporate veil when there is no real separation between the company and its owners (e.g., comingling personal and business bank accounts or using business assets for personal uses), when the owners were wrongful or fraudulent (e.g., recklessly borrowed and lost money), when creditors suffered an unjust cost and the court wants to correct this unfairness, or for other reasons (e.g., failing to follow corporate formalities).

Joint Ventures. A Joint Venture (JV) is a business arrangement in which two or more parties agree to leverage their resources for the purpose of accomplishing a short- or long-term specific task, taking advantage of economies of scale and combining expertise. A common misconception is that a JV is an entity. Rather, it is a written agreement that may form a new legal structure (e.g., LLC, C-Corp, S-Corp, Partnership) - or not. Meaning, two or more parties may form a JV without forming a new legal entity.

JV agreements generally outline the parties involved, the purpose of the JV, the resources expected to be contributed by each party (e.g., funding-wise, cost-wise and services-wise), timelines for targets, how losses will be attributed, how profits will be split, and an exit plan for a party or dissolution by all parties. A JV requires parties to relinquish a degree of control. It is important that the parties assess their goals, management styles and company cultures to determine if everyone is on the same page to avoid disagreements. Entering a JV requires trust amongst the parties based on past experiences and reputations.

Generally, I advise not to form a new legal structure under a JV agreement if all parties of a JV are existing companies (versus individuals) and they like their current tax treatments and limitations of liability. The reason is because it is costly and time consuming to form and maintain new entities, and difficult to unwind (more so than exiting a JV agreement). If the JV intends to raise funds from serious investors, this may be a good reason to form a new entity (e.g., C-Corp) under the JV. In addition, if the parties wish to maintain some degree of anonymity to the public as to whom is behind a new venture (e.g., to dissuade an unreasonably unhappy customer from suing because at first glance they see deep pockets), this may be another good reason to form a new entity under the JV.

Basic Steps to File an Entity. Here are the basic steps to form an entity:

(1) Before you file for an entity – the name of which becomes available to the public, get your trademark IP in order. That entails: (i) having a trademark lawyer conduct a formal name search (and logo search, if you have one) once you’ve decided on a business name after clearing it yourself (e.g., after you’ve checked 3-4 pages deep on Google, confirmed domain names are available (e.g., on GoDaddy), conducted an entity search on respective Secretary of State site, done your own USPTO.gov trademark search checking for similar names and categories that may cause consumer confusion, and searched social media handles); (ii) arranging for a trademark lawyer to file trademark applications in various classes and countries, depending on business scope and reach; and (iii) securing domain names and social media handles.

(2) File the Articles of Incorporation (AOI) form through the Secretary of State site for the entity type of your choice after consulting with your tax professional.

(3) Draft Bylaws for the entity.

(4) Obtain an EIN number from the IRS after your entity has been approved by the Secretary of State using your new corporate number.

(5) File a Statement of Information (SOI) form through the Secretary of State site within 90 days of filing (or other timeline the state you’re filing in sets forth).

(6) Create the first Written Consent of the organization (e.g., to establish a BOD, elect Officers, adopt a fiscal year, etc.).

(7) If you filed for a corporation, the default type in California is a C-Corp. If you intend to have an S-Corp instead to receive a flowthrough tax treatment, you must file IRS Form 2553 within 90 days of filing the entity.

(8) Check with your local county and city laws to see if you need to file a business license or business permit.

(9) Create a physical 3-ring notebook containing corporate formation documents for easy reference (e.g., AOI, Bylaws, EIN letter, SOI, Consents and Minutes, Form 2553, business licenses/permits).

(10) Open a bank account and a business credit card. You need the EIN and AOI for the bank. Keep personal and business funds separate to limit liability and avoid piercing the corporate veil.

(11) Obtain insurance quotes to minimize risk.

(12) Mark your calendar for annual filings or to create any necessary corporate documents (e.g., SOIs, annual minutes, tax filings).

Conclusion. I hope this article has provided a background for the various types of corporations you can choose from so that you have a solid foundation before speaking with your tax professional and a corporate lawyer, and making a final decision. You may have to change the entity type later, but at least you have information to go on now to make the best decision based on the facts before you today.

Playbook Law is a solo firm providing General Counsel Services for Startups and Interim In-House Counsel for Established Companies in the Technology, Gaming, Entertainment + Sports industries.

This blog is provided for information purposes only and does not constitute legal advice and is not intended to form an attorney-client relationship.

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