Foundations of New Venture Finance 285
maintains its tax status by selecting only two of these traits when it drafts its operating
agreement. In other words, if an LLC decides that it will accept limited liability and be
organized under a centralized board of directors, it cannot legally continue as an entity
after its owners die, and it cannot freely sell and trade its shares. An LLC receives some
of the benefits of a partnership and some of the advantages of a corporation, but not all
of them. Many firms, therefore, prefer to organize as partnerships or corporations.
LLC owners are called “members” and may be individuals, corporations, trusts, pen-
sion plans, other LLCs, or almost any other entity. The company must file articles of
organization with the secretary of state in the state where it operates and, in most states,
is also required to file some sort of annual report. Still, an LLC spends less time than
most corporations producing legal and tax reports. Table 7.3 compares the different
forms of legal organization on a number of important dimensions.
Private Placements under U.S. Securities Laws
Whenever an investor supplies money or some item of value expecting that it will be
used to generate a profit or return from the efforts of others, a security is created. All
national governments regulate the issuance and redemption of securities, as do all U.S.
states. In the United States, the regulatory agency that oversees this function is the
Securities and Exchange Commission (SEC). Because compliance with SEC regulations
is expensive and time-consuming, small firms and new firms find it burdensome to com-
ply. In response to their concerns, regulations have been put in place providing “safe har-
bors” for small and new businesses. These safe harbors enable smaller firms to issue secu-
rities (with constraints and limits) without conforming to the high level of regulation
Characteristic
Limited liability for ALL
owners
Owners can participate in
management w/o losing
liability protection
Number of owners
Easy to form w/o maintaining
extensive record keeping
Restrictions on ownership
Double tax
Able to deduct business loss
on individual return
Sole
Proprietor-
ship
No
n/a
1
Ye s
No
No
Ye s
General
Partnership
No
n/a
1 or more
Ye s
No
No
No
Limited
Partnership
No
Partially
1–35
No
Ye s
No
Ye s
C Corp
Ye s
Ye s
2 or more
No
No
Ye s
No
S Corp
Ye s
Ye s
1–75
Ye s
Ye s
No
Ye s
LLC
Ye s
Ye s
2 or more*
No
No
No
Ye s
TABLE 7.3 Legal Forms of Organization Compared
- Except the District of Columbia and Massachusetts
SOURCE: Adapted from “Entity Comparison Chart.” Retrieved from the Web July 14, 2006. http://www.llcweb.com/
Entity%20Comparison.htm. Used with permission of Steven E. Davidson, The Limited Liability Company Web site, http://
http://www.llcweb.com.
