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What Type of Business Structure is Right for a SaaS, AI or IoT Company? – ReadWrite

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What Type of Business Structure is Right for a SaaS, AI or IoT Company? - ReadWrite


If you’re thinking about starting a tech startup you already know — there are a lot of things to consider. The legal structure for business formation is one of those critical factors, and it has a significant impact on whether you will succeed or not.

Most SaaS, AI, and IoT enterprises are corporations. But what if a tech startup uses the LLC structure? Why should a founder entertain this idea? That’s not to deny the numerous advantages that a corporation offers, though.

This article examines all the major business structures and highlights the significant benefits of each, and particularly LLCs.

LLCs vs Sole Proprietorships and General Partnerships

SaaS, AI, and IoT companies are capital-intensive startups; it is almost impossible to get your startup off the ground if you run it as a sole proprietorship or a general partnership.

And this is not only due to lack of liability protection, though it is a significant factor attracting investors. As a sole proprietorship, your investment sources are minimal, often limited to only family members and a few close friends.

Even when you have family and friends investing in your business — the investment amount is generally quite small. Most sole proprietorships remain small businesses. If your goal is a tech business that has plans to scale — significant investment is required.

Not to mention that sole proprietorships are less reliable, from an investor’s point of view, and credibility is a significant factor driving investments. In essence, forming LLC positions you to attract investors. Business setup platforms like IncFile have also made this process easier and more efficient for businesses.

Investors are driven by a need to minimize risks and maximize returns. But sole proprietorships and general partnerships do not have the requisite structure to allow this. For one, they have no liability protection. In addition, they can neither issue stocks nor bonds.

LLCs vs Corporations

In comparison to corporations, LLCs can be more flexible with investors and investments. As members, investors can choose to become part owners of the company or only directors.

More so, investors are attracted to LLCs because they can enjoy a flexible tax regime. Unless the LLC itself specifies otherwise, the company’s profits and losses are passed to members (owners and investors) in proportion to their contribution to the company.

And even though an LLC is legally required to report its revenues, profits, and losses, it does not have to pay corporate income taxes on profits.

When you contrast this with corporations, where investors are doubly taxed (first, the corporation is taxed, then the shareholders are taxed too when they receive dividends), you find that LLCs are much more flexible.

Although, it is worth pointing out that some corporations (S-Corps; the others are called C-Corps) may get a special status that exempts them from corporate taxes. Lower tax rates allow an LLC to be more flexible with finances.

However, most institutional investors (venture capital groups, for instance) don’t mind this structure, and they, in fact, prefer to invest in corporations due to protections from issuing stocks.

While LLCs cannot issue stocks, they can sell bonds to investors. Bonds, which are technically a type of loan, can help the business raise required funds for business growth.

Long-Term Strategy

No founder wants to start a business that would only survive for one or two years. One primary consideration in creating a tech startup is the long-term strategy, per the owner/founder’s goals, especially regarding exit.

If a founder’s goal is to grow the business for some time and exit by selling the company, through merger/acquisition, or through IPO, then the corporation (C-Corp) structure might be the best. Corporations perform better on their IPO openings, and they alone can receive tax benefits via Qualified Small Business Stock (QSBS).

However, like every founder would admit, the path of a startup’s success is never clear from the beginning. So, an early exit might not be on the table initially. Many founders do like to retain significant control over their business.

However, as a corporation, the business is effectively in the hands of the investors, and the founder may even be sidelined in crucial decision-making. Even if you have a long-term exit strategy, keeping your business as an LLC protects your interest as a founder for as long as you wish.

As such, it might not be too bold an idea to start your company as an LLC and then transform it into a corporation later as the company grows.

Conclusion

Note, though, that it shouldn’t be a hard rule that all tech startups in SaaS, AI, IoT, and the likes must start as corporations. Definitely not.

Instead, founders should carefully examine their unique contexts and use the business structure that best supports the company’s growth.

This article has simply shown that LLCs help you gain many benefits and can supercharge your startup growth journey as a founder.

LLCs are often regarded as a hybrid of sole proprietorships and corporations, and that’s for a good reason. As a founder, explore all your options to play your cards right.

Joseph Chukwube

Entrepreneur, Online Marketing Consultant

Online Marketing Consultant, Joseph Chukwube is the Founder and CEO of Digitage.net and Startup Growth Guide, result-driven content marketing and SEO agencies that help brands generate organic traffic, demand and exposure. He has been published on Tripwire, B2C, InfosecMagazine and more.

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Fintech Kennek raises $12.5M seed round to digitize lending

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Google eyed for $2 billion Anthropic deal after major Amazon play


London-based fintech startup Kennek has raised $12.5 million in seed funding to expand its lending operating system.

According to an Oct. 10 tech.eu report, the round was led by HV Capital and included participation from Dutch Founders Fund, AlbionVC, FFVC, Plug & Play Ventures, and Syndicate One. Kennek offers software-as-a-service tools to help non-bank lenders streamline their operations using open banking, open finance, and payments.

The platform aims to automate time-consuming manual tasks and consolidate fragmented data to simplify lending. Xavier De Pauw, founder of Kennek said:

“Until kennek, lenders had to devote countless hours to menial operational tasks and deal with jumbled and hard-coded data – which makes every other part of lending a headache. As former lenders ourselves, we lived and breathed these frustrations, and built kennek to make them a thing of the past.”

The company said the latest funding round was oversubscribed and closed quickly despite the challenging fundraising environment. The new capital will be used to expand Kennek’s engineering team and strengthen its market position in the UK while exploring expansion into other European markets. Barbod Namini, Partner at lead investor HV Capital, commented on the investment:

“Kennek has developed an ambitious and genuinely unique proposition which we think can be the foundation of the entire alternative lending space. […] It is a complicated market and a solution that brings together all information and stakeholders onto a single platform is highly compelling for both lenders & the ecosystem as a whole.”

The fintech lending space has grown rapidly in recent years, but many lenders still rely on legacy systems and manual processes that limit efficiency and scalability. Kennek aims to leverage open banking and data integration to provide lenders with a more streamlined, automated lending experience.

The seed funding will allow the London-based startup to continue developing its platform and expanding its team to meet demand from non-bank lenders looking to digitize operations. Kennek’s focus on the UK and Europe also comes amid rising adoption of open banking and open finance in the regions.

Featured Image Credit: Photo from Kennek.io; Thank you!

Radek Zielinski

Radek Zielinski is an experienced technology and financial journalist with a passion for cybersecurity and futurology.

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Fortune 500’s race for generative AI breakthroughs

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Deanna Ritchie


As excitement around generative AI grows, Fortune 500 companies, including Goldman Sachs, are carefully examining the possible applications of this technology. A recent survey of U.S. executives indicated that 60% believe generative AI will substantially impact their businesses in the long term. However, they anticipate a one to two-year timeframe before implementing their initial solutions. This optimism stems from the potential of generative AI to revolutionize various aspects of businesses, from enhancing customer experiences to optimizing internal processes. In the short term, companies will likely focus on pilot projects and experimentation, gradually integrating generative AI into their operations as they witness its positive influence on efficiency and profitability.

Goldman Sachs’ Cautious Approach to Implementing Generative AI

In a recent interview, Goldman Sachs CIO Marco Argenti revealed that the firm has not yet implemented any generative AI use cases. Instead, the company focuses on experimentation and setting high standards before adopting the technology. Argenti recognized the desire for outcomes in areas like developer and operational efficiency but emphasized ensuring precision before putting experimental AI use cases into production.

According to Argenti, striking the right balance between driving innovation and maintaining accuracy is crucial for successfully integrating generative AI within the firm. Goldman Sachs intends to continue exploring this emerging technology’s potential benefits and applications while diligently assessing risks to ensure it meets the company’s stringent quality standards.

One possible application for Goldman Sachs is in software development, where the company has observed a 20-40% productivity increase during its trials. The goal is for 1,000 developers to utilize generative AI tools by year’s end. However, Argenti emphasized that a well-defined expectation of return on investment is necessary before fully integrating generative AI into production.

To achieve this, the company plans to implement a systematic and strategic approach to adopting generative AI, ensuring that it complements and enhances the skills of its developers. Additionally, Goldman Sachs intends to evaluate the long-term impact of generative AI on their software development processes and the overall quality of the applications being developed.

Goldman Sachs’ approach to AI implementation goes beyond merely executing models. The firm has created a platform encompassing technical, legal, and compliance assessments to filter out improper content and keep track of all interactions. This comprehensive system ensures seamless integration of artificial intelligence in operations while adhering to regulatory standards and maintaining client confidentiality. Moreover, the platform continuously improves and adapts its algorithms, allowing Goldman Sachs to stay at the forefront of technology and offer its clients the most efficient and secure services.

Featured Image Credit: Photo by Google DeepMind; Pexels; Thank you!

Deanna Ritchie

Managing Editor at ReadWrite

Deanna is the Managing Editor at ReadWrite. Previously she worked as the Editor in Chief for Startup Grind and has over 20+ years of experience in content management and content development.

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UK seizes web3 opportunity simplifying crypto regulations

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Deanna Ritchie


As Web3 companies increasingly consider leaving the United States due to regulatory ambiguity, the United Kingdom must simplify its cryptocurrency regulations to attract these businesses. The conservative think tank Policy Exchange recently released a report detailing ten suggestions for improving Web3 regulation in the country. Among the recommendations are reducing liability for token holders in decentralized autonomous organizations (DAOs) and encouraging the Financial Conduct Authority (FCA) to adopt alternative Know Your Customer (KYC) methodologies, such as digital identities and blockchain analytics tools. These suggestions aim to position the UK as a hub for Web3 innovation and attract blockchain-based businesses looking for a more conducive regulatory environment.

Streamlining Cryptocurrency Regulations for Innovation

To make it easier for emerging Web3 companies to navigate existing legal frameworks and contribute to the UK’s digital economy growth, the government must streamline cryptocurrency regulations and adopt forward-looking approaches. By making the regulatory landscape clear and straightforward, the UK can create an environment that fosters innovation, growth, and competitiveness in the global fintech industry.

The Policy Exchange report also recommends not weakening self-hosted wallets or treating proof-of-stake (PoS) services as financial services. This approach aims to protect the fundamental principles of decentralization and user autonomy while strongly emphasizing security and regulatory compliance. By doing so, the UK can nurture an environment that encourages innovation and the continued growth of blockchain technology.

Despite recent strict measures by UK authorities, such as His Majesty’s Treasury and the FCA, toward the digital assets sector, the proposed changes in the Policy Exchange report strive to make the UK a more attractive location for Web3 enterprises. By adopting these suggestions, the UK can demonstrate its commitment to fostering innovation in the rapidly evolving blockchain and cryptocurrency industries while ensuring a robust and transparent regulatory environment.

The ongoing uncertainty surrounding cryptocurrency regulations in various countries has prompted Web3 companies to explore alternative jurisdictions with more precise legal frameworks. As the United States grapples with regulatory ambiguity, the United Kingdom can position itself as a hub for Web3 innovation by simplifying and streamlining its cryptocurrency regulations.

Featured Image Credit: Photo by Jonathan Borba; Pexels; Thank you!

Deanna Ritchie

Managing Editor at ReadWrite

Deanna is the Managing Editor at ReadWrite. Previously she worked as the Editor in Chief for Startup Grind and has over 20+ years of experience in content management and content development.

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