

Inc. or LLC? - mcu

What would you suggest for a startup?
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rms
Startup implies rapid growth, which means you want to be a Delaware Class C
Corporation so you can raise VC money.

An LLC is fine for a business where you expect to make your money from profits
rather than a liquidity event and aren't trying to raise VC money.

~~~
tuukkah
According to this, it should be possible to convert an LLC into a Delaware
corporation later:
[http://www.feld.com/blog/archives/2006/03/entity_conversa.ht...](http://www.feld.com/blog/archives/2006/03/entity_conversa.html)

~~~
epi0Bauqu
Yes, but what's the point? Not that much difference in cost or maintenance
time. And it is just one more hurdle to deal at a time when you don't need
hurdles, e.g. when you are trying to close a funding deal.

~~~
tuukkah
I don't want to say that everybody should choose an LLC at first. Rather, if
you're not 100% sure you'll get funded by Y Combinator or other investors
soon, you can keep the LLC and its possible benefits under consideration even
if you hope for the best. YMMV.

Based on what I've read, LLC in your legislation may have tax benefits,
cheaper and easier setup process, and less yearly bureaucracy.

~~~
zach
Just a note for potentially cash-strapped California startups:

CA collects at least $800 a year for all corporations operating in the state,
_however_ , S and C corporations are exempt in the first year while LLCs are
not. That $800 is due about 120 days after incorporation and it's an annual
minimum franchise tax, so you'd have to make like $9,000 profit your first
year to recoup it.

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mcu
This will be a small to begin with, I just finished school and owe too much in
student loans to quit my day job. An LLC is attractive for the low record
keeping and tax paperwork requirements. One concern is that I see no legal
framework for vesting built into LLCs, I'd rather not roll my own.

Has anyone looked into filing an operating agreement in Nevada instead of
Delaware? Among other benefits, a cursory glance at the facts seemed to
indicate that the tax burden would be lower in Nevada.

Am I missing something obvious?

~~~
zach
An LLC has shares just like any other corporation. You just keep giving shares
to those who stay on and don't give them to those who don't. Stock options are
another matter.

The primary point of incorporating in Delaware is for the outstanding legal
and administrative structures they have for corporations. Not everyone is
incorporated in Delaware -- Apple has always been a California corporation.
But better to do it now rather than have to later.

In any state, the tax burden for a foreign corporation (one incorporated in
another state) is going to be about the same as one incorporated in that
state. That's because states have complete control over taxing revenue earned
in their state, regardless of where entities are incorporated.

Nevada is business friendly, but since the state has no income tax, it also
has a stigma of being quite popular with tax cheats. So it may increase the
chance of an audit.

~~~
rms
In PA, an LLC can have shares but only if you write the legal framework
yourself. By default, a PA LLC has membership interests, which are defined as
a certain percentage of the company.

~~~
zach
Good to know, thanks. I guess in some places LLCs are still more like
partnerships than corporations.

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ajmoir
I just inc'd in CA, I looked at LLC but that's a partnership and I'm doing
this alone.

I went for the quick and easy route. I'm looking to build a good product not a
big corporation. The less time I spend having to futz with the
lawyer/Accountants and Tax man the happier I'll be.

~~~
davidw
You can be the sole owner of an LLC.

~~~
lyndabra
If you are an LLC in Tennessee and operate as a foreign entity in PA as a
corporation - not an LLC. Would this be legal? Would you have to file Articles
of Incorporation or Amend Authority to do Business?

Please answer. Your response will be greatly appreciated.

Thank you.

Lynda

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davidw
I went with an LLC, but I think it depends a lot on your situation. Mine is
that I'm going it alone in many ways, and want to keep costs down, and don't
foresee investments in the near future.

~~~
weeblyrocks
Why not a subchapter S if you wanted to keep costs down?

~~~
davidw
From what I read, non-US citizens/residents can't take part in S-corps, and
since I am physically located in Europe, should I ever want to partner up with
someone and include them in the company, perhaps it would be easier with the
LLC. It also seemed like a slightly lower hassle way of doing things. I could
be wrong, but in the end, after doing my reading, I just picked one and got on
with it.

------
weeblyrocks
The reason most attorneys advise Delaware is that the precedents are strongest
there. Furthermore, it makes long-term legal costs lower because most
corporate lawyers are familiar with Delaware's nuances.

All corporations are C by default. You have to file a special from with the
IRS to become an S Corporation. S Corporations are flow-through entities which
are not taxed at the corporate level. The reason VCs require you to be a C
Corporation is two-fold:

1\. VCs like to have unilateral rights and terms to give them downside
protection such as liquidity preference and preferential stock classes such as
Preferred Shares. S Corporations are simpler entities which only allow a
maximum of 40 shareholders - as your company grows and you give stock grants
or options, this won't work. LLCs only allow 75 shareholders.

2\. VCs will claim that a C Corp structure gives you more flexibility. This is
marginally true, but LLCs give you the same flexibility with slightly higher
administrative cost but you can maintain the flow-through status which is
advantageous.

The real reason is they want preferred shares and special rights. Stay an LLC
or S Corporation if you don't need institutional investors. Angels are happy
to invest in well structured LLCs or standard subchapter S Corporations.

~~~
drusenko
who are you? :)

~~~
weeblyrocks
Someone.

~~~
mcu
Whoever you are, thank you. Could you suggest any good books on the VC
process? I'd like to be prepared if we decide to go that route.

~~~
weeblyrocks
You're most welcome. The best entrepreneur's legal guide is called
"Entrepreneur's Guide to Business Law" published by Thompson / West Law
written by Bagley and Dauchy. I bought it when I was doing my first start-up
and I'm sure they have an updated version. I just found one at Amazon:

[http://www.amazon.com/Entrepreneurs-Guide-Business-
Law/dp/03...](http://www.amazon.com/Entrepreneurs-Guide-Business-
Law/dp/0314223169)

In general, I think too many young entrepreneurs give up too much equity too
quickly because they fall for the "oh we're making the pie bigger so giving us
a huge percentage is fine" fallacy.

There are so many things to take into account when taking VC money. Too many
VC firms replace young CEOs quickly at which point the founders get heavily
diluted. Also be careful of VCs that try to reserve too large of a pool for
management they want to recruit.

Management team members recruited by your VC work for the VC, not for you, the
CEO. When push comes to shove, they will side with the VC because they know
the VC will find them another job if your start-up goes bust.

The golden rule of VCs is this: He who has the gold makes the rule.

~~~
weeblyrocks
One more reason to stay a subchapter S Corporation if you don't need to raise
VC money:

\- There is a special election you can make when you sell the company that
allows you to sell the assets instead of the equity which is something you can
get the acquirer to pay more for because they can get a stepped up basis at
market value and then depreciate it to create tax savings.

I don't remember the exact research, but I believe subchapter S corporations
that undertake the election sell for 10% more than companies that cannot or do
not take the election with all other things being equal.

~~~
epi0Bauqu
I believe LLCs also have this property (or something similar where a stepped-
up basis can be achieved for the buyer).

