

Ask HN: S-Corp/C-Corp/LLC - reevo

Hey all,<p>Apologies if this subject seems to come up every so often, but I've sifted through searchyc and haven't found much.<p>I plan on registering a company, with 2 others, that will, as of now, be bootstrapped into a lifestyle business. At this point, you'd probably suggest I go with S-Corp or LLC because of their tax pass through and our desire to bootstrap. However, I do not want to sacrifice any possible opportunities that may arise down the road, with respects to granting options, raising vc money, or being acquired. Perhaps these are issues I shouldn't worry about now, but I'd rather set things up properly from the get go, which is why I am considering a C-Corp.<p>Any advice on when/why an llc/c corp/s corp would be chosen would be greatly appreciated.<p>Also, I'm looking for recommendations as to who to file these papers with. I'm in southern California.<p>Thanks.
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garply
I've got both an LLP and an S-corp.

For the income pass-through reasons, you're right that a S-corp or LLP is the
way to go. If I recall correctly, the tax difference between the 2 boils down
to how much you're going to make - that is if you make over $X per year you
want one solution and if you make under $X you want the other. I was in a
similar situation, crunched the numbers, and determined that an S-corp was the
correct solution for me, but your situation could well be different. I believe
an LLC/LLP also dodges the $800 / yr that CA demands of a corp for the
privilege of doing business in its state, so that might also factor into your
consideration (not so sure about that one though, my LLP isn't in CA).

You can always convert to a C-corp later, but it doesn't seem like it makes
much sense for you now.

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reevo
Well, I plan on incorporating in Delaware if that's what's agreed upon, which,
I believe, has a much much lower annual fee. Thanks for the advice.

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garply
If you're doing business in CA you'll still need to register as a foreign
corporation, so the Delaware registration gets you very little.

<http://www.sos.ca.gov/business/corp/corp_faq.htm>

"Do I have to register (qualify) my out of state (or country) corporation in
California?"

And it looks like the LLC doesn't avoid the fee:

<http://www.sos.ca.gov/business/llc/llc_faq.htm>

"Every limited liability company which is doing business in California or has
filed Articles of Organization or an Application for Registration with the
Secretary of State's Office is subject to the annual limited liability tax of
$800."

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mdasen
This isn't going to be the answer that you want, but it doesn't matter what
corporate form you take. What matters is what you build. LLCs are going to be
the least work. You won't sacrifice things down the road - worst case, you and
your partners create a new Corp and sell the LLC to that corp.

Most likely, you aren't going to attract VC investment (most companies don't).
LLCs can grow very large (like Fidelity Investments which has profits of $1B
per year). They require little anything to run them.

Just make your product. If you're successful, it won't matter. If you're
unsuccessful, it won't matter. This is just distracting you from making your
product.

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jasonlbaptiste
Pretty sure you can convert S Corp into C Corp at a later date and declare the
multiple classes of stock needed to raise money. I believe if you convert into
a C Corp from the S Corp, you have to wait a period of time (5 years?) to
convert back into an S corp if you so wished. LLC is a different beast. I've
personally never been involved with an LLC.

I'm not an attorney or tax guy, just a startup guy.

Update: Brad Feld Explains this well/confirms some things.
<http://www.feld.com/wp/archives/2006/02/s-corps-vs-llcs.html>

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coopr
It is trivially easy to convert from S Corp to C Corp - one quick letter to
the IRS and you are done - no lawyer necessary.

I organized my last startup as an S Corp so that initial losses would flow
through to me, the founder and primary initial funder. Then, once I'd "lost"
all my investment, and we were approaching outside investment, I converted to
C Corp. This worked great, except for the loosing all my investment part.

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jakestein
I often hear people (including Brad Feld in the relevant article on the front
page of HN right now) saying that a corporation is the right choice if you
plan on seeking funding, because venture investors don't want the pass through
income that an LLC can create. VC's generally don't want to create Unrelated
Business Taxable Income for their investors.

I don't understand why these VC's don't just create a corporation to buy stock
in a LLC's. I know for a fact that at least some venture firms do this (I
worked at one that did). A corporation can own stock in an LLC, and
corporations (when the elect to be a C-corp, which I assume the VC would do)
don't generate pass through income.

The only explanation I can think of is perhaps if someone is making small,
angel or YC style investments. Then, the administrative cost of setting up and
maintaining an additional "blocker" corporation for each investment would be
significant in comparison to the total dollars invested.

I am very curious to know what the reason that firms that are investing
hundreds of thousands if not millions of dollars don't do this.

~~~
coopr
Having a C Corp is necessary only if you are seeking _venture_ funding. Other
funding, like angels, friends+family, etc is available to just about all types
of corporate structure, depending on the skill of your lawyer in setting up
the investment structure.

Most businesses won't ever get venture funding, so setting up a C Corp now
"just in case" is typically a big waste of money and effort. Instead, used
some other entity type, then if you really need to, convert to a C Corp. Your
early $ are far better spent marketing your product than on lawyers for
corporate formation activities.

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Hoff
Ask for referrals and talk to a (good) local lawyer.

There are trade-offs. There are options. There are costs. There are details.

More importantly, there are various (good) discussions and (key) decisions to
be had among all of the (potential) partners (with the assistance of your
lawyer), to ensure that all are on-board and in agreement, and that there are
agreements around the plans for incorporation and for major state transitions
including acquisition and dissolution.

Your lawyer is also then a good resource for a quick review of significant
contracts; a good lawyer knows what to look for in these agreements.

NB: This incorporation topic (LLC versus S-corp versus C-corp, taxes,
accounting, and related) seems fodder for inclusion over in the HN Library
area.

