
Why your startup should be a Delaware C-Corp, not an LLC - andrew_gust
https://launch.gust.com/blog/why-startup-delaware-c-corporation?utm_source=hn&utm_medium=social&utm_campaign=launch
======
GoRudy
Gust spends no time talking about what happens when you try and sell a C Corp.
If it's a stock sale great... if it's an asset sale, incredibly not great...
you will have double taxation.

This matters. $10M paid to the company for an asset, turns into $6.5M after
35% corp taxes (using general numbers) and then $6.5M than distributed to
shareholders, assume 30%+ (20% + state taxes + AMT (for now)) so $6.5M is now
$4.55 after taxes aka 55% paid in taxes.

Given that info just do a stock sale right? Not so easy - not all acquirers
want to buy an entire company, that comes with all the liability when
sometimes it's just an asset they want with no liability. Often times purchase
price is lower for a stock purchase with implied liability, also amortization
for the acquisition works differently and an asset purchase again can be more
favorable for an acquirer (and sometimes a higher purchase price).

~~~
kayef
Start a company today, and if you're lucky, you'll sell it no sooner than 5
years. In that case, you'll most likely qualify for QSBS, which means you'll
pay an effective rate of 0%. Only available for C-Corps. You're welcome.

~~~
GoRudy
To expand on this as it's an important point and QSBS is the reason why VCs
love C Corps... the deduction is the a HUGE benefit but also thanks to our tax
system the deduction % is not static...

The % deduction you can take is entirely dependent on the year and sometimes
month of when your stock is issued. For example we had C Corp stock issued in
February 2010 so our FEDERAL deduction was 75% NOT 100% which it would have
been if it was issued in November of the same year (Blah), also California no
longer has the QSBS deduction so you still pay the 8%+ here.

------
tptacek
You can divide equity and issue incentive equity compensation at an LLC easily
--- for less money than it takes to properly incorporate a Delaware C
Corporation. We have an LLC with multiple classes of stock and vesting, and it
took just a 20 minute call with our lawyer to get there. Our last company,
Matasano, was an LLC for its entire lifespan (we eventually filed taxes as an
S-Corp, but never reincorporated). LLCs work just fine.

You'll need a C Corp when you raise funds. But if you're not doing that right
now, it takes less than an hour to get a Delaware LLC on the Internet, and you
might as well just do that.

~~~
melvinmt
> it takes less than an hour to get a Delaware LLC on the Internet

Setting LLC's up is easy (even setting up a C-Corp is considerably easy) but
for me the problem is always to maintain it and file taxes and other stuff on
time etc. Is there any startup/service that helps me solve that problem?

~~~
LoSboccacc
posting to watch. I know similar services on the old continent but there's no
point in startupping in europe, it's just a mess all-around

~~~
fapjacks
You sound like you have experience running startup(s) in Europe. Can you be
more specific here?

------
joeax
> Incorporating as a C-Corporation in Delaware is the gold standard for high
> growth startups

Not every business is designed to be a "high growth startup". Consulting
firms, bootstrapped startups, small micro-ventures, self-published presses,
all of these benefit from the ease and simplicity of an LLC. Unless an
investor is cutting you a check for $1mil+ I would lean toward an LLC.

~~~
andrew_gust
Absolutely! For many kinds of businesses, LLCs make sense, but this post is
specifically about startups.

~~~
meesterdude
LLCs make perfect sense for startups, too.

~~~
andrew_gust
If they don't want to grant equity or take investment, sure. But doing one of
those two things means the legal costs of starting with an LLC (which aren't
standardized) substantially outweigh any tax savings, and almost no startups
prior to that point have positive cash-flow anyway so taxed profits aren't
much of an issue.

~~~
brianwawok
LLCs can grant equity just fine. Please don't spread FUD.

~~~
andrew_gust
Sure, but there isn't an out-of-the-box mechanism to do that. You have to
create a way to grant equity, which means you'll need to pay a lawyer—and
hourly rates add up quick.

~~~
staticautomatic
Still FUD. Plus, making equity deals without consulting a lawyer is a bad idea
regardless of your corporate structure.

~~~
brianwawok
Exactly. Too many people trying to push all starts into a Delaware X corp for
their own gain. Not great blanket advice for everyone, do your own research.

------
ndarilek
Here's something I'm curious about. First off, I understand that few of you
are lawyers, and any of you who are aren't being paid by me so none of this
constitutes legal advice. :) I'd certainly talk to a lawyer before acting on
it in any case, I just can't wrap my head around how Delaware is such an
advantage.

I read that Delaware C corps/LLCs are the way to go because they're
inexpensive. I'm in Texas. It looks like Texas would consider a Delaware
entity as foreign, and require me to pay additional fees to do business in
Texas. So that would appear to nullify any cost savings, since (IIRC) that fee
was larger than registering the entity here when I last checked (I.e. I could
just register a Texas LLC for $300 vs. registering somewhere else and paying a
larger fee to transact business here.)

Is that just another in Texas' long and growing list of stupid things? Or, if
your business is internet-based, are you not considered to be doing business
in Texas in the sense that a more traditional corporation would? Not sure how
that'd make sense, but...

It looks like, according to BOC 9.251, transacting interstate commerce doesn't
automatically qualify as doing business, so if you might argue that a majority
of your transactions are interstate by virtue of you being internet-based, I
wonder if that makes a difference? So I'm wondering if this is a way that
Texas is strict that other states aren't because, as I understand it, other
states charge significantly more for LLC filing?

[http://www.sos.state.tx.us/corp/foreign_outofstate.shtml](http://www.sos.state.tx.us/corp/foreign_outofstate.shtml)

Thanks.

~~~
pdshrader
Startup/Venture Capital lawyer here (but not your lawyer). The foreign
qualification requirement is fairly universal - California has it, too. There
are occasions when incorporating in a different state can be beneficial, but
generally if you're raising VC $$, VCs are going to want to invest in a
Delaware C-corp.

Delaware is NOT the cheapest, but it is extremely flexible (both legally
speaking and administratively speaking - there are very few states where you
can pay a premium and find someone to come in on a holiday/weekend to file
your restated charter to close a big deal), and it has a very well-established
body of law. That means everyone knows what to expect. Think of it like a
really great WYSIWYG editor, whereas other states' laws can be like coding a
site in a brand new alpha release programming language.

~~~
jawns
> it has a very well-established body of law. That means everyone knows what
> to expect

Delawarean here! Having spent some time as a writer/reporter learning about
the Delaware incorporation process, I've found that this is one of the biggest
reasons why companies/investors continue to prefer Delaware.

Wyoming and Nevada are also known as business-friendly states in which to
incorporate, but no other state has the wealth of case law that Delaware has.

~~~
pdshrader
True, but most people don't actually know the practical effects of having an
established body of law. Mostly because it's difficult to compare Delaware
with 49 other different sets of rules in a digestible format.

Here's one example of the difference between CA and DE: California, as a
baseline, generally requires class votes on amendments to charters. Delaware,
as a baseline, generally requires only a majority of all capital stock to vote
in favor of an amendment to the charter. This means that in California, the
holders of common stock (or the holders of a prior venture round stock) could
potentially block a future round of financing, which most VCs would say is not
a great result.

~~~
toast0
This gets murkier though because California law declares corporations to be
'quasi-California corporations' if they meet certain requirements such as
having principle offices in the state, and then declares that some California
corporate law rules apply. Case law isn't clear, so often class votes are held
even if not required.

~~~
pdshrader
Ehh, since VantagePoint (DE Supreme Court affirming Chancery Court, 2005) and
Lidow (CA appellate court in dicta, 2012) there hasn't been anything saying
that Section 2115 _should_ apply that I've come across. It's not perfectly
settled, but it's not unreasonable to rely upon.

------
Digory
A reminder: LLCs aren't one tax status.

You can have an LLC taxed as an S-Corp, an LLC taxed as a C-Corp, or an LLC
taxed a pass through. Anyone who says an LLC is taxed in a particular way is
way over simplifying to the point of confusion.

But, to over simplify on my own, Delaware is popular because it has a history
of protecting shareholders over management. The movie Wall Street exists
because in the 80s, companies tried to protect themselves from investors --
and Delaware stuck with shareholders firing management (not entirely, but
significantly). In theory, investors may pay a bit less if you're in a state
without that track record.

But, there are plenty of exchange-traded LLC securities, so it's not a bar or
ban to fundraising.

------
biztos
Probably a stupid question, but if you're bootstrapping a startup into which
you _might_ (but also might not) take investment at some point, wouldn't it be
better to do whatever has the lowest cost and administrative overhead, and
then sign over all its rights/assets/etc. to a fresh Delaware C-Corp when/if
you have investors ready?

So for example if you're in California you might do a California LLC
until/unless you have a VC ready to back you. Or if you're in Germany you
might do a UG (aka "mini-GmbH").

The point being to get yourself a legal structure and liability protection at
the lowest possible cost in both money and distraction, and if it turns into
something you want to sell some or all of to Silicon Valley you make a new
company to own the old company's assets.

IA(obviously)NAL but it seems like you should keep things simple until you
need them to be a certain way.

~~~
brianwawok
Yes. This is what most people do. The C Corp making no profits with no
employees is a total waste.

------
eastdakota
LLCs pass losses and gains through to their "members" (the equivalent of a C
Corp's shareholders). While this can be tax advantageous to closely held
firms, it creates significant complexity for professional investors. As a
result, professional investors typically insist companies they invest in be C
Corporations.

As for Delaware, there's the most legal precedent on corporate law in the
state making its rules the most predictable. Uncertainty increases risk and,
therefore, decreases investors' interest.

There are lots of things you should be innovative on when starting a company,
corporate structure is almost never one of them. If you're starting a business
and think you may raise money from professional investors, incorporate as a C
Corp in Delaware.

~~~
uiri
An LLC can choose its tax status - that can be as a sole proprietorship (for
single member LLCs; basically it all goes on your personal return), as a
partnership/S corp or as a C Corp.

I agree that you should either do a domestic LLC or a Delaware C Corp
depending on whether you want a lifestyle business or a high growth venture
capital-backed startup.

------
not_that_noob
The one reason not mentioned here that may tilt it in favor of a C-Corp is if
you anticipate that your company will likely be bought at some point (i.e.
strong market interest). When you incorporate as a C-Corp (or convert to one),
the clock for a QSBS exemption starts ticking (see:
[https://blog.wealthfront.com/qualified-small-business-
stock-...](https://blog.wealthfront.com/qualified-small-business-stock-2016/))
The QSBS exemption can make your first $10M free of federal tax, and so is a
very nice benefit. There is no QSBS exemption for an LLC - you will have to
convert to a C-Corp, and the clock starts ticking on conversion.

------
morisy
There's legitimate reasons for wanting a C-Corp over an LLC, but we were an
LLC for 7 years and almost nothing the author mentions was an issue:

a) Legal liability? "Limited Liability" is what the LL in LLC stands for. b)
Dividing ownership? If you keep things simple, like a 50-50 split, not a
problem at all. c) IP ownership? What?

Yes, if you're raising money you probably need a C-Corp, but if you keep
things relatively simple, the transition doesn't need to be expensive or time-
consuming.

~~~
transitorykris
The page never says a. or c. There is even a venn diagram down near the bottom
showing they both have these qualities. It's arguing for incorporation, and
then specifically as a c-crop.

~~~
morisy
Ah ok. I was reading the subhead "how is a C-Corporation different from an
LLC? Here’s the rundown." as implying that the content was right below that
about the differences.

------
loourr
He forgets arguably the most important consideration - taxes.

C-corps have double taxation and LLCs do not. For every dollar you pay
yourself from your cooperation you'll have to pay on the order of 15% more.

If you plan to never make money or just make money by raising money then a
C-corps is for you. Other good argument is if you plan on going public.
Otherwise strongly consider the tax implications before starting a C-Corp.

~~~
msf5042
If there's a chance you will want to be raising funds or giving out equity
than it might be cheaper to form as a C-Corp, temporarily elect S-Corp status,
and elect to remove that S-Corp status when need be.

------
StClaire
Fun thing about Delaware: they have an equity court run by the state that
functions as a secret arbitration panel. But instead of ruling in line with
the law, they rule in line with what's deemed "fair," hence the name "equity
court."

Unfortunately we don't know how they rule so we can't run statistics on it.
But if anyone would like to leak a data set, feel free to leave me a message
in this thread

~~~
jawns
You're talking about Chancery Court:
[http://courts.delaware.gov/Chancery/](http://courts.delaware.gov/Chancery/)

I'm not sure what you mean by secret. Here are some of its recent opinions:
[http://courts.delaware.gov/opinions/index.aspx?ag=court%20of...](http://courts.delaware.gov/opinions/index.aspx?ag=court%20of%20chancery)

~~~
StClaire
I got two things confused. They _had_ secret arbitration as part of the
Chancery court and but apparently it was shut down by the federal courts

Thanks for pointing that out

[http://articles.chicagotribune.com/2014-03-24/news/sns-rt-
us...](http://articles.chicagotribune.com/2014-03-24/news/sns-rt-us-delaware-
supreme-court-20140324_1_arbitration-cases-u-s-court-delaware-coalition)

~~~
Pyxl101
Arbitration proceedings are normally private and confidential, by consent of
both parties, so the fact that it was "secret arbitration" isn't surprising.
It looks like the news media were describing this as "secret courts", which
seems a little sensationalist.

It seems to have been a way for standing court judges to decide arbitration
cases. Without knowing anything about the circumstances, that seems better
than having other people who are not judges decide arbitration cases, no? What
was the problem with it?

This page seems to have more detail:
[http://apps.americanbar.org/litigation/committees/commercial...](http://apps.americanbar.org/litigation/committees/commercial/articles/spring2014-0514-third-
circuit-rejects-delaware-court-of-chancery-confidential-arbitration-
program.html) \- since it was a government-sponsored program, the public has
the right of access because courts have a tradition of accessibility.

------
fish2000
I haven’t got a ton of experience in this arena, but what I have done in the
past is: 1) incorporate the larger venture as an LLC (“My Company, LLC”); 2)
incorporate the specific project as a C-Corp (“My Company’s App, Inc.”) – my
partners and I own the LLC, which controls the C-Corp, which holds the assets
of the project.

Specifically, this makes it easier if we want to sell ”My Company’s App“ to a
Facebook- or Google-class buyer entity. The LLC can also incorporate a bank,
if ”My Company’s App“ needs to start conducting transactions that necessitate
the use of (say) a Federal Reserve client (á la Venmo or Stripe).

~~~
charlesdm
I don't see how this would make it easier? What advantage do you have?

~~~
fish2000
Separation of concerns, fungibility, limited exposure, a lower bar on future
legal entanglements … I could go on

------
louprado
I formed a Delaware C-Corp when I had a different vision for my company.

But now I have no plans to raise capital, get co-founders, issue stock, etc. I
just want to run the company as as a solo-founder cash cow.

I never issued a single share (even to myself), never assigned any IP, and the
company has no tangible assets. I just ran expenses and payroll through the
company. I suspect that would make closing the C-Corp easy. I'll then create a
new CA LLC with completely separate books.

I realize HN isn't a free legal advice forum, but any comments regarding the
challenges of closing a DE C-Corp would be appreciated.

~~~
pdshrader
Startup/Venture Capital lawyer here (but not your lawyer). Winding up a
corporation can take a little time, but it's generally not terribly complex.
It's mostly filing a few forms with the state. However, there are more
considerations that you'll want to make as you decide what to do - one
question being, "who is liable for the acts of your company before the CA LLC
existed?" Entities, when properly used, can shield you from personal
liability. But if the entity is no longer in existence, then you may end up
being personally liable for any acts (without the proper planning).

------
mmckelvy
The information in this post is not entirely accurate.

You can certainly issue incentive equity, divide up ownership, AND take money
from outside investors with an LLC. We did it frequently at the private equity
fund I worked for a few years back.

Little known fact -- if you structure your employee's incentive equity as LLC
profit interests, the ultimate payout is treated as capital gains as opposed
to ordinary income (which is the case for vanilla options) for tax purposes.
It does take a little more structuring but definitely worth the hefty payoff
in my opinion.

------
CalChris
Is it true that you may enter the funding cycle as an LLC but that as a
practicality you won't exit funding as anything but a C, that angels and VCs
will insist on this restructuring? I think the answer is yes but I don't know.

Can someone price the cost of converting a Delaware LLC to the C structure
that VCs will expect? I think (again, I don't know) that we're talking about a
couple of grand of post-money lawyer time.

Early stage startup founders have a lot on their plates. Getting this nuance
right to save a few bucks will cost some upfront neurons and some time for
something which is ultimately procedural. The OP suggests that we mentally
work through this ahead of time and I see the point. But it's like priced
equity vs SAFE. It requires a lot of upfront neuron work.

The LLC vs C tax issue seems to be a bit of a canard. You most likely won't
have any profits to tax this early and you won't exit funding as an LLC.

Anyways, as the Zuckerberg Florida LLC example shows, you can get these things
slightly wrong and still move forward. Getting something infinitely right will
guarantee that you will never move forward.

~~~
pdshrader
Startup/Venture Capital lawyer here (but not your lawyer). Agreed with
chimeracoder below. As for cost, a few grand is a good minimum estimate, but
it really depends on the complexity. If you've been around as an LLC for a
while, you may have different types of equity that has been issued (e.g.
profits interests), which will complicate the conversion process a bit. Your
lawyer will also have to review the LLC's operating agreement to make sure
there aren't any funky protective provisions or oddities that will complicate
the conversion. Unlike most Delaware C-corp charters in the startup world, LLC
operating agreements are extraordinarily flexible and variable documents, so
it's a custom review almost every time we have to go through one of these
conversions.

------
tnicks
There are three points of his, with which I have personal experience, where I
believe the article is incorrect.

1\. Division of ownership in an LLC can be made very similar to a C-Corp. In
all rights and restrictions. In an LLC it is typically called a Unit instead
of a Share. You can sell a PPM (Private Placement Memorandum) for Units, at
some par value, to raise money. You can dilute Units. Units can have voting
rights or not. His statement on division is clearly incorrect from my own
company where we had many initial investors. Some were institutional, some
were individual, some were via investment vehicles.

2\. He states LLCs don't have Options. This is also not entirely true. The
similar vehicle in an LLC is called a Warrant. Warrants can have the same
rights and restrictions as Options. Warrants are used to incentivize employees
with ownership rather than cash. Again, in our company we used Warrants to
attract talent and compensate early employees to great effect.

3\. Protection is another point he brings up. Yes the Corp (C and S) is battle
tested in the courts. Yes LLCs have not been tested to quite that extent.
However, to flatly state that a C Corp will protect you is a little
overselling what the reality is. The Corporate Veil is not impermeable. As a
matter of fact, it is most often pierced (outside of blatant misconduct) by
attacking under or low initially capitalized companies and closely held
businesses. Companies like startups who start small and become successful
quickly.

I see this particular article as not having researched LLCs, their use case,
and the benefits they possess in some cases over Corporations. I understand no
SV VCs will talk to you unless you have a C-Corp. I get it many Lawyers in the
startup ecosystem want you to create a C-Corp. But this is truly a small
percentage of businesses and even a small percentage of startup businesses.

Why blanket write off any particular solution (or all others for that matter)
without first checking to see if it can meet your specific needs?

------
rajivtiru

        Most angel investors and VCs will also insist that your company be a Delaware C-Corporation for legal reasons
    

I keep hearing this, but what are these reasons?

~~~
rsweeney21
If you invest in an LLC then you will be purchasing membership units. If you
have membership units in an LLC, then you have to file a tax form every year
(K1) that reports your portion of the earnings or losses from the LLC. The
investor will have to pay the taxes on his portion of any profit generated by
the LLC, even if the LLC didn't distribute any the profit.

Investors typically have dozens of investments. Filing K1s for all of your
investments is a huge amount of work.

~~~
epc
The LLC issues the K-1 to the investors, you just attach it like the other
1099ish forms you receive from other sources of income (e.g. 1099-DIV).

~~~
chrismaeda
As an angel investor, I don't want to deal with that kind of hassle. If the
company is losing money, it may want to carry forward the tax losses to offset
future profits. If the company is making money, are you also going to
distribute cash to your investors to offset the tax liability you just threw
onto them? Will you get my K-1 to me well in advance of the April 15 filing
deadline so I can plan my taxes, or will you piss me off by getting me a K-1
on Apr 14 and surprising me with a last minute tax liability? If any of your
investors are non-US persons, now they have to file US income tax returns.
These are the practical reasons why investors hate pass through entities.

~~~
epc
Which is entirely fair. I don't think I've ever received a K1 before April
15th, including from the venture funds I invest in.

------
ChicagoDave
Anyone starting a business should consult an attorney and an accounting firm,
discuss your business, discuss your short and long term goals (are you
planning to run the business forever, with partners, or sell it as soon as
possible?)

They will help you determine the best solution for incorporation.

There is no cookie-cutter answer to incorporation and anyone that pushes one
is probably selling you something and most likely not an attorney or
accountant.

------
no_wizard
For those of you who aren't raising money or have cash flush from VCs: how do
any of you, if you're in California, handle the LLC 800 dollar min tax? Do
federal deductions against the business typically negate it?

I understand the reasons for not having a direct LLC in Cali (Delaware, Nevada
and Wyoming are the gold standard I realize)

Just wanted to know in practice if you just bite the bullet on the stupid
minimum tax or not

------
wheelerwj
I hate to be _that_ guy, but no one should take legal or accounting advice
from a blog post. There are a lot of good reasons for your company to be an
LLC or C-corp and there are a lot of good reasons to incorporate outside of
Delaware.

Nevada for example also has no corporate income tax. Montana, South Carolina,
and New Mexico don't specifically regulate money transmitters.

Delaware is great for share holder rights, but if you don't have a lot of
growth or external investors yet, incorporating in Delaware may be overkill as
you can always do so later.

Mostly, startups should be focused on product, not things like incorporating
until you need to. And by then, spend the lousy 2k on an attorney to advise
you and do it properly.

~~~
chrismaeda
You're confusing domicile with state of incorporation. E.g. A Delaware corp
resident in Nevada pays no state income either. As others have said, if you
plan to raise outside capital and have an exit, then you should be a Delaware
C Corp. If you are planning a lifestyle business, then an LLC in your state of
residence is fine.

~~~
wheelerwj
im not confusing anything. Deleware C corp is beneficial for a lot of reasons.
so is an LLC. Many startups might have both.

Corporate structures are significantly more complex than:

> if you plan to raise outside capital and have an exit, then you should be a
> Delaware C Corp.

------
forgottenpass
Spoiler alert: Gust is not your lawyer, don't take legal advice from them.

~~~
willholloway
Why is this the default answer to any discussion on topics such as these?

I look at it as Vaudeville acts vs Hollywood films. Or local hack community
college professor vs Youtube Stanford Machine Learning Course.

The legal and tax situation is written into the law. The VC outlook on this
topic is common knowledge.

So why do we have to pay expensive consultants (attorneys, accountants) for
what are in reality just FAQ's.

Incorporating an LLC is one of the easiest government interactions I have ever
had. It is literally a one page form, the hardest part is picking the name of
the company (definitely check the US trademark office database and get the
.com)

It was the same for the Delaware C Corp I created. A one page document that
needed to be faxed.

All the rest of the paperwork was very elegantly handled by Clerky.

I think there is a big risk in going for advice from an attorney and getting
bad advice. I feel much more comfortable in broad research on a topic and
crowd-vouched and vetted knowledge rather than trusting one sole practitioner.

------
sangd
Nothing about S-Corp? We did the C-Corp twice and we've never got to the level
we wanted so we switched both times to S-Corp. Currently we're as S-Corp and
it saves us a lot of money.

------
startupdiscuss
Here is my question:

How can issuing options be worth the cost of taxation?

I mean, eventually, you get taxed 35% extra! How can the ability to issue
options possibly offset that massive value transfer out of the company?

------
cammio
Belgium has a 0% tax on selling shares. Left wing parties want to change that.
I hope they're never in enough power to do so.

------
sGatling1788
They're overdoing it with:

"you want ownership of these intellectual property assets to be the property
of the startup, not the individual founders" ... "means that nobody can hold
the company’s future hostage purely on the basis of their past contributions"

This ain't so easy nowadays.

------
louprado
If I understand correctly, a California company that forms a Delaware C-Corp
will not only have to pay California state taxes but also 7.8% taxes to
Delaware.

Is my statement accurate ? 7.8% of net profits is such a huge expense I can't
understand how any company justifies it.

~~~
desdiv
No. That 8.7% tax is for taxable income derived from Delaware i.e. if you
physically operate out of Delaware.

------
omouse
One of these days I've gotta write, "why your startup should be a co-
operative".

------
meesterdude
Your startup should be a C-corp only if you are raising money and want to take
on the additional organizational complexity.

Otherwise the author is wrong to try and say that all startups should take
this path and not LLC.

Especially if you're bootstrapping, LLC is the way to go.

------
dantelabs
If you quit your job during the year (let's say June), then you can deduct
your LLC losses the next year, and receive a nice tax refund. You can't do it
with an C-Corp.

------
mgamache
Note: You may also lose the ability to get local (state/city) tax breaks and
government money if you are an out-of-state corp.

------
graycat
Sure, he's correct -- if and only if make a lot of assumptions.

But he is talking about startups, and there, from all I can see and without
his many assumptions, a Delaware C-Corp is a lot more time, lawyer money,
other overhead, and botheration than just an LLC.

Sure if I have co-founders, which YC seems to want but I don't, or Sequoia
wants to write me an equity check for $20 million, which, by the time they
would, I wouldn't need, want, or accept it, I'd want a Delaware C-Corp.

But, IIRC, with a C-Corp, I have to have a BoD that I have to keep happy, or
they can and very well may fire me -- take my company. So, a Delaware C-Corp
has me take a lot of the power I have as CEO and 100% owner of my startup and
hand a lot of that power, control, and financial value to a BoD for no good,
and many really bad, reasons. "Financial value"? Sure, the BoD could fire my
ass, put in one of their buddies as CEO, and the BoD and their buddy could
issue nice stock options to the members of the board. Due to vesting, etc., I
could leave with nothing, not even $0.00. They could flatly just steal my
company from me including all the value, cash, intellectual property, promise,
everything -- 100%.

There's nothing seriously wrong with, and a lot of important advantages to,
being CEO and 100% owner of a successful LLC startup. Or, all across the US
there are pizza shops, flower shops, auto body shops, dentists, etc. that
don't have a BoD. My startup has a lot more financial promise than an auto
body shop, but I don't want a BoD either.

E.g., with a BoD, have to have board meetings. Then the members of the board
have to travel to the meeting. So, guess where the money comes from for their
travel (first class air, limo service?), lodging (four star hotel?), fancy
dinners? No thanks.

I learned early on that I'm not always good at pleasing people, even if I do
really good work. E.g., my Ph.D. is in applied math, and I did the research
independently with no faculty direction or input, picked the problem before I
went to grad school, and did the core research in six weeks alone in the
library in my first summer. I gave a graduate seminar on my work, designed and
wrote the illustrative software, wrote and typed the dissertation, stood for
my oral exam (majority of the faculty from outside my department, Chair,
Member, US National Academy of Engineering, from outside my department,
majority people I'd never met), passed, first time, without revision, from a
world famous, world class research university, and got my Ph.D.

BUT: In the eighth grade, the arithmetic teacher gave me a D (as is common for
boys of that age, my handwriting was awful and so was my clerical accuracy)
and fervently advised and urged me never again to take anymore math. Right,
honey: I didn't take freshman calculus, taught it to myself, started on
sophomore calculus in a course using the same text Harvard did, found the
course easy, and made an A. In my high school, all the female teachers
(gossips?) were all conviced I was a poor student and a poor math student, but
the only male math teacher I had sent me to a state math tournament, my
aptitude and achievement tests showed that I was one of the best math students
in the school, an especially good high school, I got sent to an NSF summer
math program, and on the school's SAT math scores, of 1-2-3, I was #2. #1 went
to Purdue. #3 went to MIT. In college I wrote on group representations and got
Honors in math. My math GRE score was 800. Then I was sent to another NSF
program, in axiomatic set theory and modern analysis. But my high school
female math teachers thought I was a poor math student. I was a very good math
student, but there was no way I could please those females.

Being good is not enough. Instead, people can get totally pissed at you for no
good reason, even if you walk on water in warm weather.

A BoD might just hate my guts. E.g., if I presented some original math
derivations, with advanced prerequisites, for a step forward for part of the
business, say, as part of getting the budget approved, the BoD might soil
their clothes, the board room furniture, and the carpet on the way to the rest
rooms and come to deeply, profoundly, bitterly hate and despise me, all for no
good reason.

If have something rare and good, don't dilute it with a lot of mediocre
nonsense. If are lucky enough to have Michelangelo painting the ceiling, don't
send in a lot of house painters to give him advice. Or, when Stravinsky wrote
_Right of Spring_ , some Tin Pan Alley guy wanted to recommend a good
_arranger_ for Stravinsky's music. For such nonsense, just say not only "no"
but, if they insist, "hell no".

Reporting to a BoD has a big downside, a huge risk for no good reason, and
nearly no significant upside. E.g., there is a good chance that not one BoD
member of an information technology startup anywhere in the world has even the
math prerequisites to understand the crucial, core math I derived for my
startup; not understanding the math, they will not be able to do their jobs
and will hate me. So, no way do I want to put my career and startup in the
hands of a BoD that hates me.

------
edpichler
Once I create a C-Corp can I change it later to a LLC, for selling assets
later and paying less taxes, per example?

------
rajacombinator
Don't form a C Corp until you have investors ready to pay for it. (100k+
check.)

------
personjerry
What if I'm Canadian? Is it better to incorporate in Ontario or Delaware?

~~~
piker
Do you mind paying US tax?

~~~
personjerry
I don't mind, in fact I was under the impression US tax was lower than
Canadian tax

------
n0us
Why no mention of S-Corp?

~~~
edoceo
S-Corp is a pass-thru, so not acceptable to take outside money. The investor
wants a C-corp. But home State or Deleware is debatable. I chose home State vs
Delaware for tax reasons

~~~
zekevermillion
LLC's are also passthrough by default, though you can elect another tax
treatment easily enough. The problem with s-corps is that a valid s-election
requires that all stockholders are humans. The presence of a business entity
stockholder would void your s-corp status. Keep in mind that an s-corp is not
a different kind of entity, it is just a corporation that has a valid election
for passthrough taxation under subchapter s and equivalent state income tax
provisions.

~~~
edoceo
Yes. And sometimes the investment round you take is from a group of investors
that have formed their own LLC - this one LLC takes smaller monies from
investors and then, as the LLC becomes an investor in your Corp. So, their LLC
need you to be a C-Corp. Or add each of the dozen+ LLC members to your own cap
table, what a mess.

------
jakemor
Reading this made me want to incorporate as an llc... lol

------
elastic_church
AND THE COUNTERPOINTS:

1\. An LLC is easy and you can form a C-Corp whenever it is needed. If your
investors are equity/debt firms, they can form the C-Corp for you at that
time.

> but most startups usually stick with Delaware and file a foreign
> qualification form to operate in their own home state.

2\. There are at least 55 states and territories in the United States which
ALL HAVE THEIR OWN SEPARATE incorporation laws. Their legislature hasn't been
asleep for the last 30 years, there is real competition in fees, regulations,
anonymity, taxes and incorporation structures in many jurisdictions outside of
Delaware.

If their courts encountered an unforeseen problem, they can all lean on
Delaware's entire body of case law. So the benefits of Delaware's court of
chancery are overstated, and the circumstances where you want that or its
arbitration are slim.

3\. Delaware's oh-so-progressive corporate laws also include parallel
securities transparency laws that can introduce compliance burdens above and
beyond what the Federal Government stipulates.

Conclusion: You don't need a C-Corp and you don't need to incorporate in
Delaware. Being spoonfed the perks of Delaware is easy and barely anybody is
publicly talking about what other states offer, and you will have to do your
own research.

KPMG and Deloitte and PWC produce annual documents on incorporation perks in
jurisdictions all around the globe. Including individual United States.

------
droithomme
A Logical Fallacy: We did something we think might be right for us (but we
don't really know yet), therefore everybody in the entire world should do
exactly the same thing regardless of their circumstances, and divorced from
whether or not this actually works for us or not.

~~~
pdshrader
Agreed. The argument Gust presents here for making a C-corp is pretty darn
thin, if not verging on inaccurate.

I agree that a C-corp is the right way to go if you're planning on raising
venture rounds, but the three reasons presented (can grant stock, can grant
options, and required by investors) are misleading at best. LLCs can grant
membership units/shares and profits interests, which can act functionally very
similar to stock and options.

------
Kinnard
I wonder when we will be able to integrate blockchain based entities like
Aragon into the startup economy:

[https://aragon.one/](https://aragon.one/)

We haven't seen things like the first acquisition, the first bankruptcy,
mergers, etc . . . and don't even know if those things are exactly possible as
we conceive of them today.

~~~
ska
That sounds like a category error.

Your individual and/or corporate actions happen in a legal jurisdiction -
technology does not change that.

~~~
vidarh
It'll be interesting to see "solutions" like that run into the first clashes
with a legal system that is not inclined to accept "the software won't let us
do that" as a valid excuse for not complying.

~~~
Kinnard
I tend to think about it the other way. I think it'll be interesting to see a
legal system's first clashes with "code doesn't do that".

~~~
vidarh
Most legal systems have hundreds of years of experience with clashes with
people saying "we can't do that". It's one of the oldest excuses around.

The solution tends to be to either assign whatever applicable fines or other
punishments applies, or to put someone in jail for contempt until the come up
with a solution.

If you have structured your company in a way that makes it impossible for you
to comply with a courts decision, then that is your problem - it does not
absolve you of the responsibility to comply with the courts decision.

There's simply nothing new there. Blaming technology will rank up there with
"the dog ate my capitalization table" on the list of arguments the court will
not care about.

