C Corporation Planning: Will your Business Grow and go Public?

I talk a lot about LLCs, and why I prefer them in most instances. But here’s a time when I don’t. There is really only one way to go public, and that’s through a C Corporation.

Nothing else is flexible enough to give you access to the widest possible shareholder base while maintaining control over business operations. S Corporations are limited in both the number and type of shareholders. C Corporations, on the other hand, can have a limitless number of shareholders, who may reside anywhere in the world. And an LLC making a C Corporation election won’t work, because it doesn’t have stock to trade on a public exchange.

Stock is the lifeblood of a C Corporation, especially one that wants to go public in the future. So when you’re planning your C Corporation, take that into account. You will want to create a large enough share reserve, also called a Treasury, that you have plenty to sell for years into the future. That’s very different from LLCs – in the LLC world, when you add another member you shuffle the percentages around (i.e., 4 members have 25% ownership, add a Member and now 5 members have 20% ownership). In a Corporation you issue fresh shares to the incoming shareholder.

Another huge advantage C Corporations have over other structures like S Corporations is their ability to have multiple classes of stock. This can be enormously helpful when you are trying to design a structure that will let you stay in control as your business grows and more shares are issued. One common method is to issue preferred, non-voting stock to a corporation’s founders, which can then be converted to voting stock when the corporation goes public. Now the founders can stay in control, even after several new million public shares have been added to the corporation’s bank of issued shares.

But if you’ve started off your business in another kind of structure, all is not lost. It’s pretty simple to merge an LLC into a C Corporation, or even to create a C Corporation and sell the LLC ownership into it, effectively making the LLC a 100% owned subsidiary. Now you’ve got the C Corporation in place for your public registration plans.

There are many variables when you’re structuring a business. That’s why it’s hard to go through a quick-service website. Unless you talk to someone who’s got some knowledge and experience on both the tax and the legal side, it’s hard to know what you don’t know. And that can leave you vulnerable.

Got questions? Contact us! We’re here for you.

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