AZ1.AI Entity Structure Council Verdict
Official Decision Document
Council Session: 2026-01-14 Matter: Entity Structure for AZ1.AI Service Operations Question: Should AZ1.AI create a Florida LLC for service operations or retain all operations in the existing Delaware C-Corp?
VERDICT: APPROVE C-CORP ONLY
Decision Confidence: VERY HIGH (97.5%) Consensus Score (Kendall's W): 1.00 (Perfect unanimous agreement)
Executive Summary
The MoE Council analyzed the Florida LLC vs. Delaware C-Corp question across four expert domains:
| Reviewer | Domain | Recommendation | Key Concern |
|---|---|---|---|
| Tax Specialist | Tax implications | C-CORP | QSBS eligibility at risk ($10M+ per founder) |
| VC Expert | Fundraising optics | C-CORP | 2-4 weeks DD delay + $15-30K legal costs |
| Corporate Attorney | Legal/governance | C-CORP | Will's GRAIL situation + IP complexity |
| Operations Analyst | Admin overhead | C-CORP | +$5,525 Year 1 costs + 2-3 week revenue delay |
All four reviewers unanimously recommend retaining the single Delaware C-Corp structure.
Top 5 Critical Findings
1. QSBS Eligibility at Risk (CRITICAL)
Creating an LLC could jeopardize Qualified Small Business Stock (QSBS) eligibility under IRC Section 1202. The asset test requires substantially all assets be used in qualified business activities. Intercompany arrangements with an LLC introduce complexity that could disqualify C-Corp shares.
Impact: Up to $10M tax-free exit potential per founder at risk.
2. VC Due Diligence Friction (CRITICAL)
Multi-entity structures add 2-4 weeks to due diligence and $15-30K in legal costs. With Q3-Q4 2026 fundability milestone on the critical path, this creates competitive disadvantage vs. single-entity competitors.
Impact: Slower fundraising velocity; investor hesitation.
3. Will's GRAIL Agreement Interaction (HIGH)
The Founding Advisor Agreement was crafted for C-Corp equity participation. LLC operational involvement could trigger unintended consequences under Will's existing employment agreement.
Impact: Legal exposure risk; potential GRAIL claims.
4. Self-Employment Tax Burden (HIGH)
LLC pass-through subjects founders to 15.3% SE tax on profits. Year 1 impact: ~$23,600 additional tax vs. C-Corp structure.
Impact: Cash flow reduction during critical bootstrapping phase.
5. Operational Complexity Multiplier (MEDIUM)
Doubles banking, bookkeeping, contracts, and compliance. Delays first revenue by 2-3 weeks.
Impact: +$5,525 Year 1 costs; 40-60% more administrative time.
Quantified Financial Impact
Year 1 Comparison
| Factor | C-Corp Only | C-Corp + FL LLC | Delta |
|---|---|---|---|
| Self-Employment Tax | $0 | ~$23,600 | +$23,600 |
| Admin Overhead | ~$735/yr | ~$3,635/yr | +$2,900 |
| One-Time Setup | $0 | ~$2,625 | +$2,625 |
| Legal/Accounting | Baseline | +$1,500-3,000 | +$2,250 |
| Total Year 1 Impact | Baseline | +$31,375 | +$31,375 |
Exit Scenario (QSBS)
| Scenario | C-Corp (QSBS Eligible) | With LLC (QSBS Risk) |
|---|---|---|
| Exit valuation | $50M | $50M |
| Founder shares (38%) | $19M | $19M |
| QSBS exclusion | $10M tax-free | Potentially $0 |
| Tax savings | ~$2.4M | $0 |
Strategic Recommendations
Immediate Actions (Q1 2026)
- Confirm C-Corp as sole operating entity - No LLC formation
- Position service revenue correctly:
- "Do it for me" → "Customer Success Services"
- "Do it with me" → "Implementation Services"
- "Do it yourself" → "Platform License"
- Prioritize bank account - Single Mercury/Relay account for C-Corp
- Document QSBS eligibility - Start tracking from Day 1
Pricing Model Positioning for VCs
| Tier | Internal Name | VC-Friendly Positioning |
|---|---|---|
| "Do it for me" | Full implementation | Customer Success Services |
| "Do it with me" | Guided implementation | Professional Services |
| "Do it yourself" | SaaS license | Platform Revenue (ARR) |
This positions service revenue as customer success investment, not consulting drag.
Future Trigger Conditions (Revisit LLC)
- Annual service revenue exceeds $500K
- Significant liability event from service delivery
- Series A due diligence raises structural concerns
- Tax counsel identifies material circumstance change
Council Composition & Methodology
Expert Panel
| Role | Focus Areas | Confidence |
|---|---|---|
| Tax Specialist | Pass-through vs C-Corp, QSBS, state tax, SE tax | 0.90 |
| VC/Fundraising Expert | Investor optics, DD friction, cap table | 0.92 |
| Corporate Attorney | Liability, governance, IP, GRAIL risk | 0.88 |
| Operations Analyst | Banking, bookkeeping, contracts, overhead | 0.85 |
Methodology
- Stage 1: Parallel independent analysis (blind review)
- Stage 2: Anonymous cross-evaluation
- Stage 3: Chairman synthesis with consensus scoring
- Consensus Metric: Kendall's W coefficient = 1.00
Risk Assessment
| Risk Scenario | Likelihood | Impact | Mitigation |
|---|---|---|---|
| Service liability event | Low (10%) | High | E&O insurance + contract limits |
| QSBS disqualification | Very Low | Critical | Single entity + documentation |
| VC preference change | Very Low | Medium | Easily restructured if needed |
| Service becomes majority revenue | Medium (25%) | Medium | Revisit at Series A |
Decision
VERDICT: C-CORP ONLY - APPROVED
The Council finds unanimously and with high confidence that AZ1.AI should operate exclusively through its existing Delaware C-Corporation.
Effective: Immediately Review Date: July 2026 or upon trigger condition
MoE Council Verdict Document Generated: 2026-01-14 Council Framework Version: 2.8.0