
C Corporation vs S Corporation vs LLC - matt1
http://www.themoneyalert.com/Corp-Entity-Table.html
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tptacek
The advantage to going as far as an LLC is that LLCs can be invoiced and can
cut PO's. It's also the bare minimum you need if you have cofounders.

Buried in this table is the major difference between LLC, S, and C:

* Any team member who has equity in an LLC is a member, a.k.a. partner, and members can't take W2 wages, only distributions.

* Conversely, employees of LLCs can't technically hold equity.

* Any external investor in an LLC (probably) must be an SEC "accredited investor", meaning that they have $1MM in the bank or several years of income over $200k.

* The major difference between S and C seems to be that C corps can have preferred (ie, VC) stock.

The long and the short of it is that equity is a mess until you're a C corp,
and then everything else becomes a mess.

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vaksel
whats a PO?

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jmatt
purchase order

<http://en.wikipedia.org/wiki/Purchase_order>

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timae
We just went through this decision process. Ended up doing S-Corp for the
following reasons:

LLC vs S-Corp:

1\. Membership interest vs. Stock: Shares of stock are easier to deal with
than membership interests, from an investor and giving to employee
perspective.

2\. Taxes: Every dollar you take out of LLC is salary (and subject to payroll
taxes). In an S-Corp, any money you take out of the business after paying
yourself a "normal" salary is a distribution and free of payroll tax.

3\. The costs to set-up are nearly the same if you're able to create the
articles of incorporation, corporate by-laws, and initial meeting minutes
yourself (required for S-Corp). Not that difficult with Google and a $17 book
from Barnes & Noble.

4\. Conversion to C-Corp if we raised VC money: Much easier to convert from
S-Corp.

C-Corp vs. S-Corp:

1\. Losses: We expect to incur losses in year 1. In a C-Corp, those can be
carried forward to subsequent years in which you have a gain, but in an
S-Corp, you can take them on your personal return in that year.

2\. Double-taxation: If you only plan to pay a salary, then there is no double
taxation, because that's deductible from the C-Corp, however, if you take a
distribution, that would be taxed at both the corporate and personal level
with the C-Corp (only at the personal level in S-Corp).

3\. Investors: Will have to convert to C if we raised VC money, but that's not
the plan in the near term, and its easy to switch if we need to.

4\. A potential downside to the S-Corp for taxes is that the profits will be
taxed at your marginal tax rate (because its all incremental income) as
opposed to going through the levels of the progressive tax structure as it
would in a C corp. If you only plan to pay yourself a normal salary, then C
could be the way to go depending on how much you expect to make.

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lionhearted
"2. Taxes: Every dollar you take out of LLC is salary (and subject to payroll
taxes). In an S-Corp, any money you take out of the business after paying
yourself a "normal" salary is a distribution and free of payroll tax."

\--> That one is HUGE in favor of S-Corp over LLC. That's 7% on all income
over whatever you can justify as your base salary. If a company is going to be
small-ish and profitable for a while, S-Corp is worth a few thousand dollars
each year at the cost of added paperwork. LLC has more flexibility, but S-Corp
can do all the same things if you don't mind filling out more documents and
maybe thinking about it a bit more.

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tptacek
No, that's 7% on all income over what the IRS will justify as your base
salary. =)

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sanj
S-Corps cannot have non-US residents.

That forced us into an LLC (and since, into a C-corp).

I'd suggest you talk to a lawyer. 90% of them will be able to cut you a deal
on a simple C-corp.

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willhf
What do ycombinator startups incorporate as?

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gasull
Delaware C corporations.

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startingup
Has anyone switched from a C to S corp (yes, you read that right)? How painful
was it?

Here is the situation: an existing small, moderately profitable company has
decided to stay out of VC circuit, stay private, run it as a life-style
business. C corp involves double taxation, which S corp avoids. They had
grander dreams once (hence C corp) but now the situation has changed.

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matt1
Newb question -- I don't really get the asset protection part of limited
liability.

Say I sell my house to fund my business, then my LLC flops and I have to
declare bankruptcy. I still lost my house, no?

Now say I take a loan out for $70K to fund my LLC and it flops and I have to
declare bankruptcy. Then do I get to keep my house?

What's the difference?

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skmurphy
If your LLC flops (or your C corp or Sub-S corp) you don't have to declare
bankruptcy provided you haven't pledged your personal assets to the company or
it's creditors. Your LLC/C/Sub-S creditors can't come after your house or
other assets unless you have personally pledged them at some point.

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matt1
I'm still missing something. Clarified hypothetical situation:

Situation 1: I have a house worth $250K. I sell it and use $100K to fund my
business. My business flops; I'm out the $100K.

Situation 2: I keep my $250K house and get a loan from my bank for $100K. My
business flops; creditors can't come after my house because I'm behind the LLC
firewall, right?

Why would anyone ever choose situation 1?

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skmurphy
In Situation 2 you have pledged your house against the 100K loan, the fact
that an LLC is involved is immaterial. There is nothing that can protect you
when you want to take equity out of your house and you lose all of the money.

Situation 3, you borrow money to start your business, it takes off, you pay it
back and your business continues to grow. Later you are sued and lose a 10M
lawsuit wiping out all of the assets in your business and then some. If you
have a corporation your personal assets are normally protected from this loss.
Alternatively your large and growing business is struck by a meteorite (which
can come in many forms) that wipes out all of your assets but leaves you with
the liabilities. If you are incorporated winding down the business normally
doesn't affect your personal assets.

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matt1
Good post, thanks.

(I know you're not a lawyer, but am trying to get an impression for this). Say
instead of $10M I get sued for $50K. In the $10M case I clearly can't pay that
but in the $50K case, I might be able to sell my car, move into a cheaper
house, etc, in order to pay it. Am I protected in both cases? What about $10K?
At what point is it "OK, you can't pay this, go declare bankruptcy so you get
to keep your personal assets"?

I think I need to hit the books...

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skmurphy
If you lose a lawsuit (or are hit by some flavor of meteor) the business has
to pay for it to be able to continue. All that creating a corporation does is
to clearly separate what are personal assets from corporate assets.

It may be easier to visualize if you imagine there are several shareholders.
Each would want it clear what were the company's assets and what were their
personal assets (in addition to their share of the company).

Look at it this way, you buy 100 shares of GM which subsequently goes
bankrupt. Your shares may be worthless but GM's creditors cannot come after
you as a shareholder for more than the equity that you contributed (the money
you paid for your now worthless shares).

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ensignavenger
Interesting- in Missouri, an LLC can choose to be taxed as a Proprietorship or
a Corporation. I don't know how other states do it.

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micks56
FYI: Massachusetts is the only jurisdiction in the US (that I am aware of)
that requires at least 2 members for an LLC.

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matt1
"Contrary to what you may have read just a few years ago, you can now form an
LLC with just one person in any state (or the District of Columbia)" - Pg 16,
Nolo's Quick LLC

I happen to have read this last night :)

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chaostheory
overall it's a useful chart... I just didn't like the liability part for LLCs.
To me (a lawyer could prove me wrong - I'm not a lawyer), LLC (and I think S
corp) members have the same liability as a proprietorship if they are company
operators (ie not just a passive investor).

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dawie
Which one do most startups choose? LLC?

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tptacek
LLC, though you won't take outside funding without switching to a C corp.

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aneesh
How hard is it to switch?

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tptacek
From LLC to S/C? Annoying.

From S to C? Very easy.

