Hello and thank you for your question.
Public companies are almost always corporations, so as I describe
below, there is something to be said for organizing your venture as a
corporation at the start. You'll probably want to make a subchapter S
election, however, especially if there's a likelihood you will run a
tax loss in your startup years. That will allow the founders to
deduct any losses on their personal returns, and will eliminate most
exposure to double tax.
"An eligible domestic corporation can avoid double taxation (once to
the shareholders and again to the corporation) by electing to be
treated as an S corporation. Generally, an S corporation is exempt
from federal income tax other than tax on certain capital gains and
passive income. On their tax returns, the S corporation's shareholders
include their share of the corporation's separately stated items of
income, deduction, loss, and credit, and their share of nonseparately
stated income or loss."
If you are so fortunate as to have your organization acquired by a
public company, the advantage of organizing your venture as a
corporation is the possibility of the acquisition being structured as
a tax-free reorganization under Internal Revenue Code Section 368.
There's a good, short summary of the reorganization rules on pages 51-52 of
2001 Federal Taxation Refresher Course
Tax Implications of statutory merger ("A" reorganization)
"IRC §368(a)(1)(A)basic requirement for classification = transaction
carried out under state statutory merger provision
Target shareholders must have continuity of interest, so long as 50%
of consideration is voting stock ok to receive cash, bonds, etc."
Commentary on Law and Cases of Business Corporations, 1st. Ed
Tax Implications of "B" reorganization
Defined as 80% of voting power of the target now held by the acquirer
Must be funded SOLELY by stock of the acquirer for tax classification
One level of tax target shareholders each pay a tax on their capital gain
No ability to amortize the purchase priceā but deductions from stock
costs not very high (not so bad for acquirer)"
Tax Implications of "D" reorganization (triangular merger)
"IRC §368(a)(2)(D)allows subsidiary to use its parents stock instead
of its own to carry out the merger (one or the other)
Generally treated as type A mergers tax free (deferred) reorganization
Even though the transaction as a whole may qualify for tax free
treatment, the non-common stock proceeds (i.e. cash, bonds) are
[In some circumstances, as the following Regulations describe, it is
also possible to structure a Section 368 statutory merger around an
LLC as well as a corporation, but this is a highly technical area, and
sometimes the merger involving an LLC will qualify; sometimes it
and see Multiple Step Acquisitions: Dancing the Tax-Free Tango
Corporate structures are also most useful where the hope is to attract
For example, "Mezzanine financing represents the middle layer of
financing on the balance sheet of an investee company after senior
debt, which is traditionally provided by the major banks. A typical
mezzanine investment includes a term loan and some form of equity or
equity-like participation ? normally stock, warrants to purchase
stock, or a participation right. This structure gives mezzanine
financing characteristics of both debt and equity financing. The
interest rate charged on the loan component can vary but is normally
around 8-12% with varying payment options. The loan is almost always
subordinated to loans made by one or more senior secured lenders, such
as the major banks. "
Private equity ideas
And see, "Represented venture capital fund in a $1.8 million bridge
loan to a corporation using convertible promissory notes and the
subsequent corporate reorganization of issuer."
To summarize, although this is a very technical area, it's safe to say
that a corporate form is most amenable to public company acquisitions,
and might even be tax free. And venture capital funding is most
easily attracted to a corporate structure.
Search terms used:
subchapter s basics site:irs.gov
368 reorganization "statutory merger" basics
Thanks again for letting us help.
Google Answers Researcer