Do You Need That C-Corp?

Sometimes I run across comments from entrepreneurs embittered by their experience with lawyers. A common complaint will go something like “Every lawyer will try to force an overly-complex C-corp on you — the more time they spend working on it means more money for them — and they’ll try to pressure you into a C-corp ‘because you might go public’. If you read up on the subject you can form a much simpler business entity on your own.”

Like with many things, there is some truth to the above opinion. First, I agree that every entrepreneur needs to do their own homework to try to grasp the legal aspects of whatever issue may be at hand. If and when you do retain legal counsel, you can have a more productive relationship with your attorney if you have some understanding of the legal concepts he or she discusses with you. Second, for a small, single-owner business, it is possible for an entrepreneur who sufficiently educates herself or himself to form a business entity without the help of an attorney that effectively protects and supports the interests of the owner and of the business.

I suspect that the lawyers the above opinion warns about are either attorneys or firms who don’t focus on the startup space and may not be experienced enough to advise adopting a simpler business entity better suited to a small startup, or are Vault Top 100 law firms — BigLaw attorneys focus on ‘because you might go public’ because that’s where the money is made. If you’re a small startup, you’re probably better off going with a similarly-sized boutique firm or solo attorney whose practice focuses on startups — I can think of at least 5 practices, including my own, in the Boston area that fit that definition, and a quick Google search would probably reveal many more. Boutique firms and solo attorneys don’t charge the high hourly rates of BigLaw, and can be more open to alternative billing practices such as flat fees or partially deferred hourly fees.

So, do you really need that C-corp? For many businesses that I’ve worked with, an LLC is perfectly fine; furthermore, while an operating agreement is critical for multi-member LLCs, I also recommend them for single-member LLCs — every sole owner I’ve come across was at least open to the idea of partners or investors down the road, so I prefer to set them up with an agreement that will protect them at least somewhat in the event they do take on partners or investors and they don’t return to me or another attorney for a more comprehensive agreement. The only kinds of startups that need C-corps are those that intend to seek private equity financing within the next year or two — why waste an investment converting a LLC into a corporation? — or a company that intends to pay employees with equity.

If you’re worried about an attorney heaping a load of unnecessary work on you and running up a large bill, the best advice is to educate yourself about the legal issues — know what your options are and what the pros and cons of each option are for your situation; that way, you can have a more productive conversation with your attorney, and can interject if the attorney suggests a C-corp for your sole-owner business that you intend to grow organically.