
Ask HN: What are the tax advantages of incorporating vs. an LLC? - bsbechtel
I&#x27;ve often heard that it&#x27;s advantageous to incorporate your company as a Delaware Corporation instead of an LLC if you are expecting to invest heavily in growth for a number of years. Based on corporate and llc&#x2F;individual tax rates, I don&#x27;t really see the advantage. I was wondering if someone could explain why this is the case. Thanks!
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leepowers
Partnerships, S-Corps, LLCs are pass-through entities - meaning profits are
treated as self-employed/contractor income, and excluded from corporate taxes
(though you can elect to have an LLC taxed as a corporation, which may be
advantageous in certain situations). However, pass-through income is subject
to self-employment taxes, which currently sit at about 15%.

S-Corp - if your business is earning a lot of profit it can make sense to pay
yourself a salary and the remainder of profit as a distribution, which is not
subject to the 15% self-employment tax: [https://turbotax.intuit.com/tax-
tools/tax-tips/Small-Busines...](https://turbotax.intuit.com/tax-tools/tax-
tips/Small-Business-Taxes/How-an-S-Corp-Can-Reduce-Your-Self-Employment-
Taxes/INF22938.html)

C-Corp - For a company you founded a QSBS or Qualified Small Business Stock
can be excluded (in whole or in part) from capital gain taxes. So, as your
company grows year after year, and it's valuation rises year over year, this
can save a lot of money when selling:
[http://www.lexology.com/library/detail.aspx?g=dde20f35-2d5e-...](http://www.lexology.com/library/detail.aspx?g=dde20f35-2d5e-4a7a-a195-9e848265fd8c)

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bsbechtel
(though you can elect to have an LLC taxed as a corporation, which may be
advantageous in certain situations)

This is really the crux of what I was trying to understand...thank you for
catching that. Can you expand on this as to why it is advantageous to be taxed
as a corporation? Tax rates for corporations all are higher than personal tax
rates. I assume the 15% self-employment tax is the difference, or is there
more?

~~~
redtexture
It is a conversation best taken up with an accountant.

If the organization is set up as an LLC, with a tax status as a partnership
taxation, the activity of the organization is going to show up on the
investor's taxes.

Investors generally are not interested in seeing new tax items show up on
their tax return, because of an investment. The tax details arrive on a form
to the investor called a "K-1". Look up "IRS K-1" for background.

Investors generally prefer capital gains, upon sale of the stock. And simple
dividends, and perhaps interest income. Not a three-page list of items flowing
from the startup's own activity scattered all over the investors tax return.

Some investors, such as university endowments, and the like, also do not want
the pass-through tax items from partnership tax treatment, and cannot make use
of them either, since they are arms of the tax-exempt university, thus demand
instead investments in C-Corp status entities.

As for location of incorporation, many huge, and many smaller organizations
incorporate in their home state. It's an entirely separate question and topic,
not to be conflated with tax filing status.

~~~
chris_va
One more thing,

With pass through entities (eg LLC, K-1), you can accidentally pass on tax
liabilities without disbursements. So your investors may be on the hook for
taxes without receiving income.

If you are ever planning on seeking investors, do yourself a favor and skip
straight to C-corp.

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brudgers
To me, the reason to form a Delaware C Corporation is to facilitate investment
from the type of investors who normally invest in Delaware C Corporations,
such as the well known investors from Silicon Valley. A Delaware C Corporation
structures a company for a particular life cycle and a particular financial
structure that is attractive to particular types of investors...including
founders with particular goals.

Roughly speaking, those investors are seeking returns via compounded growth in
the value of their equity over a period of several years.

Likewise, an LLC may also be attractive to a different particular classes of
founders and investors. In general these will be investors who are seeking
return on equity via periodic cash flows. Structuring an LLC as a pass through
tax vehicle facilitates returns via cash flow at the expense of compounding
equity growth.

To me, tax strategy is a bit of a red herring. A higher tax on a more money
often is better than a lower rate on less money for the same reasons that less
equity in a big company is often worth more than more equity in a small one.

Of course, in the end it all depends on the company and the founder's
objectives.

Good luck.

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phodo
A c corporation also gives you the ability to claim QSBS. Qualified small
business stock. If u are a c corp (not s corp) and under 50 million in assets
and some other conditions... all (used to be less but I believe it is now 100%
permanently) issued stock can now be free of federal long term capital gains
if u hold on to it for more than 5 years. I am not a lawyer but if you have
goals to grow the business you should consider this as it can save u a lot of
money in the future.

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PaulHoule
Delaware is a relatively expensive place to incorporate.

The advantages of Delaware corporations are (1) convenience, (2) privacy, and
(3) a legal ecosystem that meets the need of big public companies.

If you want to form a corporation in New York, for instance, you have to form
a board of directors, have an annual board meeting, etc. It is a lot of bother
and paperwork and most states make you do it. Not Delaware. You don't need to
have a board of directors or file very much paperwork at all to be
incorporated in Delaware.

Since there is no board of directors, their names are not on the public
record, in fact nobody's name is on the public record. You have to have some
agent that will accept documents in your name in case a process server shows
up. If you fail to respond in court, they can shut down your company and take
its assets, but they can't do anything to you because they don't know who you
are.

Finally a lot of big companies are there because there are laws that are good
for management and lots of lawyers and other corporate services people who
serve Delaware corporations. Unlike most states, the bar is not transferable
from other states to Delaware.

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jeffmould
IANAL and I am not an accountant. The short answer is that a corporation
(assuming C-Corp) is subject to double taxation. Meaning that you pay personal
taxes and corporate taxes. With an LLC (or S-Corp) you only pay personal
taxes.

The second part of your question, why an LLC over a Corporation. Well, a
corporation has shareholders, where a LLC has members. Two completely
different structures. Shareholders own stock which is easily (or easier to)
transferable.

Finally, Delaware is preferable because it has specific courts for handling
business law. The judges tend to be well-versed and the laws are "business
friendly".

The decision really comes down to what you intend to do with the business (if
you plan to raise funds through equity you will need to sell shares which, for
basic purposes, require a corporation), who is going to be involved in the
business, and what your long-term goals. You should consult with an attorney
or accountant prior to making a decision.

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codegeek
"Based on corporate and llc/individual tax rates, I don't really see the
advantage."

Yes, correct. Incorporating in Delaware is not so much about saving taxes.
Delaware is considered to be friendly towards corporations and the legal
system actually understands the challenges a business goes through. For
example, Delaware has a Court of chancery that focusses specifically on
business law and uses judges instead of juries [0]. Things like that.

[0] [http://www.bizfilings.com/learn/incorporate-delaware-
nevada....](http://www.bizfilings.com/learn/incorporate-delaware-nevada.aspx)

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tmaly
I spoke to a lawyer and the recommendation I got was to go with a Delaware
LLC.

The lawyer stated that the business law is more concrete and predictable in
Delaware. If you have to go to court, it is going to be easier on your
company.

If you plan on raising funding for your startup, go with a C corp instead as
it is easier to deal with things. You can always convert an LLC to a C corp
but that is more hassle later.

If you do not plan on taking funding, and you want a lower accountant bill, go
with the LLC. The pass through income on your schedule C is a lot cheaper to
deal with.

