
Startup Company Form: LLC or S-Corp? Which is easier and which is better? - sabat

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pg
Ordinarily a startup should be a C corp. It's cheaper to be an LLC, but if you
plan to succeed, you may as well do things right from the start.

With an LLC profits don't get taxed twice like in a regular corporation. So it
makes sense to be an LLC if you expect to have substantial profits, but don't
expect to grant options, sell shares, or get bought. Consulting firms and law
partnerships are often LLCs. YC is an LLC.

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RyanGWU82
The big reason why C corps are preferable is because S corporation
shareholders can only be people -- not other businesses, like VC firms. (S
corps also can't issue preferred stock.) An S corporation can't take venture
capital without first reverting back to C corp status. But an S corporation
can save a lot of money on taxes.

But although many of our businesses _want_ venture capital, most are unlikely
to get it. In fact, I'd hazard a guess that more tech startups will have
income than will have external corporate funders. (This usually happens when
the founders need some money, so they put their original idea on hold and do
some consulting for a while. Eventually they're doing exclusively consulting,
because it pays well, or at least it pays off quickly.) By that point, you're
probably unlikely to remember the tax consequences and switch to an S corp.

Why not start out as an S corp, and switch to a C corp iff you acquire VC or
sell preferred stock?

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pg
The startups we've seeded are more likely to get funding than to consult on
the side. When they do consult on the side they do it as individuals, not as
the company.

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nickb
VCs want to invest into a C-corp because it allows them to have a flexible
share structure so if you're seeking VC money, C-corp will be a must. But, in
the mean time, you CAN use S-corp since it is easy to set up and gives you
some protections. S-corp can be easily converted into a C-corp (a single
supplemental form!). LLC is not as easy to convert to a C-corp and paperwork
is fairly complex and will cost you several K.

Thing to note about S-corps is that all founders _MUST_ be American citizens.

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shiro
.. or resident aliens. <http://www.irs.gov/instructions/i2553/ch01.html>

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dpapathanasiou
Dharmesh Shah wrote about this recently:
<http://onstartups.com/home/tabid/3339/bid/1303/Startup-101-Should-You-Form-
An-Inc-or-LLC.aspx>

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chwolfe
From the article: "My personal practice has been to create an LLC (they are
simple, avoid double taxation and still support multiple classes of stock if
needed). If and when the time comes to convert the LLC to a C-corp, the
process is not that difficult. Whatever costs you would incur in the
conversion process, I think are offset by the upside you get during the time
that you can benefit from being an LLC. An LLC can be setup for a few hundred
dollars and likely meets the needs of most early-stage entrepreneurs."

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davidcatalano
To me the answer is simple: If you are looking to be VC or angel funded yet
are just starting out then you should save the money and start an LLC. If you
don't plan on VC funding then stick w/ an S Corp.

In 1999 we had an LLC and we converted it to a C Corp just before we acquired
funding in 2000. This time around I'm a partner in an S Corp and am self-
funding it. If my current situation changes, as someone already mentioned, it
will be easy to change over to a C Corp.

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edgeztv
What exactly is the reporting/paperwork required for a C-corp (which people
mention as more overhead than LLC)?

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dhoward
I don't see it as a big deal but C corps require Board of Director meetings,
Shareholder meetings, corporate minutes and corporate resolutions. From what I
read, LLCs don't require these things but you may want to do them if your LLC
involves more than a few people.

LLC taxes probably aren't much different than corporate taxes. Calculating
profit is the hard part and you have to do that in both cases.

Creating an LLC is often just a little bit of paperwork, just like a
corporation. It may vary, depending on your state. Since you only do it one
time, anyway, the burden in terms of creation paperwork isn't usually
significant.

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Mistone
if you take money from investors they will require you to be a C-Corp. If this
path is in your plans, it is probably easiest to start off this way.

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timg
I went for a Delaware C-Corp. Costed me $300 to incorporate + 30 in annual
fees, so far for the first year. This was a relatively large expense for me so
let's hope it was worth it.

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lindsayrgwatt
You should be able to get your annual fees down below $300 - it should only be
about 1/2 that

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timg
edit: you are correct.

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lindsayrgwatt
Maybe I'm wrong, but I read the page above differently from you. The $200 fee
applies to LLCs, Limited Partnerships or General Partnerships.

You're a C-Class Corp right? Therefore you pay the corporate franchise tax. If
you go to the link on the page entitled "Franchise Taxes Here":
<http://corp.delaware.gov/frtaxcalc.shtml>

it tells you what it should be. Your fee will vary depending upon how many
shares you have outstanding, but I'm guessing you have less than 3,000
therefore it will be $35.

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sabat
An LLC has less overhead, from what I understand, but maybe there are
buyout/VC implications? What do most startups do these days?

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gibsonf1
We went for a California LLC after doing a few weeks of research. It is the
easiest structure we could find with the least expense. We don't know what the
future funding implications are for it though.

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felipe
I heard that a LLC can be converted to a Corp when you get funded. I'm not a
lawyer, so I'm not 100% sure about it.

