Can an LLC Go Public: Everything You Need to Know
Businesses might wonder can an LLC go public? The answer is yes. There is plenty to consider before making this change, however.3 min read
Businesses might wonder can an LLC go public? The answer is yes. There is plenty to consider before making this change, however.
What Is a C Corporation?
A C corporation pays federal income taxes and is subject to federal income tax. This is unlike an LLC that is taxed as a partnership or an S corporation. Shareholders in a C corporation aren't subject to taxes unless the business pays them in the form of distributions, salary, or dividends.
Founders normally start their startups that are high growth as C corporations. This is done assuming that venture capitalists will require them to eventually change into a corporation so they can receive funding.
What Is an S Corporation?
An S corporation has an advantage of not being subject to federal income tax. The shareholders of the business are in charge of paying federal income tax on any taxable income of the S corporation. If the LLC wants to receive pass-through tax treatment, an S corporation can be a good choice for the business.
What Is an LLC?
S corporations and LLCs are pass-through entities, which means their members are responsible for paying the taxes on any income the LLC allocates to them. This is defined in the operating agreement that was formed when the LLC was created. Unless an election occurs to make an LLC taxed as a corporation for a sole member, it will be considered a disregarded entity. This means the one member will report any income or loss from the LLC on their tax return.
LLCs that have more than one member will be treated as a partnership and need to file Form 1065. The exception to this is if the entity decides to be taxed as a corporation. All members of the LLC get treated like partners for federal income tax reasons. They'll each receive a Form K-1 to report their share of any income or losses for the LLC on their personal tax return.
LLCs are structured to have either one or multiple members in the entity. Members can be added or taken out for the duration of the LLC. Any profits can be distributed in various amounts to the members depending on what was agreed upon in the operating agreement. All members of LLCs are protected against debt that the company takes on.
Why Shouldn't I Choose to Form an LLC?
The following are reasons a company should not form an LLC:
- If they're planning on giving ongoing and regular grants to employees
- Having a goal of selling the company to a larger business in exchange for stock or cash
- Reinvesting the maximum amount of capital into the business as possible
- Having more than one round of financing
Some investors don't like LLCs for various reasons. They think it will make their personal tax situation more complicated if they become a member in an LLC that's taxed as a partnership. Other investors can't invest in companies that are pass-through because their partners are tax-exempt and don't want to receive active business or trade income due to their tax-exempt status.
LLCs who get taxed as partnerships usually have provisions in their agreements stating when and how cash will be distributed to each owner to cover taxes that are owed on the company's income. This can possibly make it complicated for the entity to reinvest its money to further grow the business. If the company has an active business or trade in other states, some investors may be subject to income tax in those states as well.
Other investors simply prefer to make an investment, get a capital asset, and not have any other tax issues or complications until the stock gets sold and a capital gain or loss event occurs. It's more difficult, expensive, and complex for equity compensation to get taxed as a partnership than it is to have equity compensation in an S or C corporation.
It's also harder to raise extra capital through an LLC compared to raising the next round through a corporation. The agreements for LLCs are more complex to prepare than corporation agreements are.
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