What is the Right SaaS for Startup Business Structure, AI and IoT?
There are many things you need to know if you’re considering starting a tech company. One of the most important factors in determining whether your startup will succeed is how it is business structure.
Most SaaS and AI enterprises are corporations. What if a startup uses an LLC structure? This is a good idea. However, it is important to recognize the many benefits that a corporation can offer.
We discuss the main business structures and highlight the significant benefits of each, specifically LLCs.
LLCs vs Sole Proprietorships and General Partnerships
SaaS, AI, and IoT companies require capital to start; it’s almost impossible for a startup to succeed if it is run as a sole proprietorship, general partnership, or sole proprietorship.
This is due to a lack of liability protection. However, it is an important factor in attracting investors. Your investment sources as a sole proprietorship are limited, and often restricted to family members or close friends.
The investment amount for your business is usually small, even if you have friends and family investing. Sole proprietorships are small businesses. You will need to invest if you want your tech company to grow.
Sole proprietorships are less trustworthy from the investor’s perspective. Credibility is also a key factor in driving investments. In short, LLCs can help you attract investors. Online business setup platforms such as IncFile make this process much easier and more efficient.
Investors are motivated by the desire to reduce risks and maximize their returns. However, general partnerships and sole proprietorships do not have the structure necessary to permit this. They lack liability protection. They cannot also issue bonds or stocks.
LLCs vs Corporations
LLCs are more flexible than corporations in terms of investors, and investments. Investors can become either part-owners or sole directors as members.
Investors are attracted to LLCs for their flexible tax system. Unless otherwise stated in the LLC, profits and losses of the company are shared with owners and investors according to their contributions to the company.
Even though LLCs are legally required to report their revenues, profits, and losses, they don’t have to pay corporate income tax on profits.
This contrasts with corporations where shareholders are double taxed. First, the corporation is taxed, and then the shareholders when they receive dividends. LLCs, however, are more flexible.
It is worth noting that S-Corps (the others are called C-Corps), may be exempt from corporate taxes. However, LLCs can have more flexibility with their finances due to lower tax rates.
However, institutional investors (venture capital groups, for example) don’t mind the structure and prefer to invest in corporations because of the protections offered by issuing stocks.
Although LLCs are not permitted to issue stocks, they may sell bonds to investors. Bonds are technically a loan and can be used to help the company raise funds necessary for growth.
A founder doesn’t want to create a business that will only survive for a few years. The founder’s long-term goals and exit strategy are the most important considerations when creating a startup tech company.
The corporation structure (C-Corp), might be best if the founder is looking to grow the company for a while and then exit the business through a merger/acquisition or an IPO. Corporations are more successful in IPO openings and can also receive tax benefits through Qualified SMB Stock (QSBS).
However, as every founder will admit, it is not always easy to chart the course for a startup’s success. An early exit may not be possible at the beginning. Many founders want to keep a lot of control over their businesses.
The business, however, is effectively a corporation and the owners can make important decisions without the involvement of the founder. Even if your exit strategy is long-term, an LLC will protect your rights as a founder.
It might be a good idea to create an LLC first and then convert it into a corporation as your business grows.
It is not a rule that all startups in tech, including SaaS, AI, and IoT, must be established as corporations. Absolutely not.
Instead, founders need to carefully analyze their contexts and choose the business structure which best supports their company’s growth.
This article has shown you that LLCs can be a great tool for startup growth and can help you become a better founder.
LLCs are often seen as a mix of sole proprietorships or corporations. If you are a founder, it is important to explore all options in order to make the best of your situation.