
What’s wrong with an LLC? - transburgh
http://entrepreneur.venturebeat.com/2010/04/19/what%E2%80%99s-wrong-with-an-llc/
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grellas
LLCs are useful entities that fit the needs of many startups.

The main limitations: (1) can't do the equivalent of ISOs and so the options
you can grant will always be "non-qualified" (generating ordinary income on
the "spread" at the time of exercise); (2) need to do custom drafting, with
attendant expense, to mirror standard corporate tools in the LLC context
(restricted unites in lieu of restricted stock, preferred units in lieu of
preferred stock, etc.); (3) passive investors will wind up paying employment
taxes on net income of the venture even though they are not employees (see the
lively HN discussion comparing the LLC to the S Corp on this point, here
<http://news.ycombinator.com/item?id=1063516>); and (4) for tax reasons
related to their LPs, VCs can't invest in them.

Among the advantages: (1) more informality in management (normally by
consensus among members, reflecting the LLC's strong partnership roots); (2)
can get tax pass-through without needing to abide by S Corp limitations (with
S, can have only one class of stock, can't have foreign shareholders, can't
generally have entity shareholders - all of which you can have with an LLC and
still get the tax pass-through); (3) can do specialized allocation of losses,
which is an important factor for certain investors; (4) can grant profits-only
interest to key founders who would otherwise take big tax hit in taking
significant equity in an established, high-value startup.

The biggest practical advantage of an LLC is also its biggest practical
limitation, and that is that it is like the siren song tempting founders to do
quickie, online setups for their startups "just to get started." This is fine
for some purposes but can lead to problems if founders use their startup kits
to fill out standard templates without taking proper precautions to protect
their IP (by failing to capture it for the company), to protect their equity
structure (by making sure that founders have to earn their equity over time),
etc. In my experience, most of these situations work out without problems but
it is wise to get an initial legal consultation in such cases to make sure
that, if you take the attendant risks, you do so with open eyes.

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gte910h
Talking with _multiple accountants_ before last setting up my LLC, all said
don't think of doing anything but setting it up as a S-Corp with the IRS
unless we're going to have huge, yearly losses.

It doesn't seem like it's that many steps there to turn an S-Corp filing LLC
into a C-Corp.

Additionally, I do not see why the LLC (Esp an S-Corp or C-Corp filing type)
cannot just sell itself to a newly founded C-Corp.

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gcv
I think it can, but the sale counts as a liquidity event, which means the
LLC's members must pay taxes on the income they derive from the sale. That's
why you have to get bulletproof tax advice. In addition, there may be issues
with securities laws, so you also need an expensive lawyer experienced in
dealing with this problem.

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gte910h
Securities laws are _mostly_ about the sale of _public_ companies and the
purchases of _public companies_.

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mcantor
Despite asking dozens of people and reading hundreds of articles over the
years, I have literally never heard the same explanation of LLC's, S-corps,
C-corps and related tax, liability and paperwork infrastructures twice.

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dennykmiu
I notice that whenever this is a discussion about LLC, the supposely downside
is always that the VC's prefer a C-Corp and therefore if one wishes to
eventually take VC money, then one should be proactive and not form an LLC.
That is simply not true and has not been my experience. It is true that the
VC's prefer C-Corp but they never insist on investing in companies that are
C-Corp. The best way is actually for the entrepreneurs to form an LLC to take
advantage of the tax structure and flexibility, then when you are ready to
take VC money, just let them form a C-Corp and acquire your LLC. It is not
complicate and don't let any lawyers/accountants tell you otherwise.

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minouye
For anyone with concerns about business structure, I highly recommend "The
Entrepreneur's Guide to Business Law"--while it doesn't cover all of the tax
implications of each structure, it is a great general reference for LLC vs.
S-Corp vs. C-Corp (and a myriad of other topics).

[http://www.amazon.com/Entrepreneurs-Guide-Business-
Law/dp/03...](http://www.amazon.com/Entrepreneurs-Guide-Business-
Law/dp/0324204930)

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danskil
Be warned, though, that neither alternative is generally appealing to
investors.

So what kind of corporate entity would be appealing to investor?

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kgrin
C corp; it's just that getting there from the questioner's LLC may be
expensive/cumbersome

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staunch
What is hard or expensive about converting an LLC to a C corp? Assuming two
50/50 partners in a simple California LLC.

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vaksel
frankly I don't see why with all the innovation web startups introduced, and
just the sheer number of them in existence(has to be millions at this
point)...that the government hasn't designed an entity specifically for web
based companies.

~~~
anamax
> that the government hasn't designed an entity specifically for web based
> companies.

What recent experience with govt have you had that suggests that such a thing
would be a good thing?

General rule: The desirability of a solution with certain properties has
nothing to do with whether a solution with those properties is possible, let
alone likely.

In other words, the benefits that we'd get from govt doing {whatever} well
have nothing to do with whether govt is likely to do said {whatever} well.

