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Venture Capital investments in C-Corporations

Posted on 26. Jan, 2009 by admin in Basics

In most circumstances, a company must be a C-Corporation when taking investments from venture capital firms. There are a few reasons for this:

1. VC Limited Partners (LPs) contractually obligate the VC General Partners (GPs) to avoid any pass through tax liabilities that may result in an investment into a portfolio company that wasn’t a C-Corp.
2. Even if the company was a non pass-through tax entity (like an LLC with an election to be treated as a non pass-through entity), the governance of the company would be non-standard as compared to a C-Corporation. VCs focus on C-Corps, and even though it is possible to invest in an entity like an LLC, they don’t to avoid complexity.
3. Lastly, if the company was an S-Corp, the company would immediately be converted to a C-Corp when a VC invests, as the fund is a non-person. See this post for more information.

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