LLC vs C-Corp, What should a startup go with? - mhidalgo
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biztaxtalk
What are your big concerns? Taxes or liability protection? If liability
protection, the answer will vary by state but the corporation will usually
give you better liability protection than an LLC.

From a tax perspective, the IRS doesn't recognize the LLC as a business entity
type. If you own a single-member LLC you'll be taxed as a sole-proprietor by
the IRS & pay income and self-employment taxes on the net taxable income of
your LLC. If your LLC has more than one member you'll be taxed as a
partnership. An LLC can elect to be taxed as a corporation, either C or S.

An advantage of the S Corp is the losses will flow to your personal return.
This is likely to be most beneficial in the earlier years when you're pumping
money into the company. As long as you have sufficient basis in the company,
the losses are deducted from your ordinary income on your personal tax return.

The taxation of LLCs vary by state too. Some states have a low franchise tax
on LLCs. CA, on the other hand, has a $800 minimum tax on LLC (and
corporations). The franchise tax in some states is based on gross revenues so
be aware of that if you expect to have low-margin product.

Take a look at <http://www.biztaxtalk.com> for more on taxation of various
entity types.

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nickb
Are you an American citizen or a legal resident? Are your co-founders as well?
If both answers are yes, go with S-corp instead of C-corp initially. Why?
Well, it allows you easier filing, pass-through taxation (you won't get taxed
twice like with C-corp) and best of all, you can easily convert S-corp into
C-corp by filing a single form (if you ever raise VC funding).

No VC will ever invest into LLC and converting LLC to a C-corp is a pretty
involved (and expensive) process.

If you're a foreign national or have a foreign national as a co-founder, you
should go with C-corp.

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mhidalgo
I am an American citizen. Thanks for the info, its really confusing and there
seems to be a lot of conflicting arguments on this matter. I am looking for
outside investment not specifically VC, but probably eventually.

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ajkates
In most cases, I'd advise initially starting out as a Limited Liability
Company of the state in which you reside. The main reason for this is that you
(and your contributors) can get tax write-offs for investing in your startup.
Also, it's much cheaper and easier to set up than a corporation, and provides
a great deal of legal protection for your co-founders. There's really no
reason to bother with an S-Corp, since an LLC essentially has all of the
benefits and far less drawbacks.

However, most VCs won't fund an LLC for a number of legal reasons. If your LLC
is planning to pitch to VCs, I'd recommend incorporating (into a
C-corporation) before doing so. Sure, it will cost you a few thousand dollars
in legal fees and paper work, but I don't know of any VCs that don't require
incorporation first.

Also, I'd recommend incorporating in Delaware, since Delaware law is extremely
forgiving to new startups. There's a reason why so many businesses are
registered in that state...although, many startups have been incorporating in
California recently as well.

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rms
LLC is probably cheaper and easier and more flexible and better for you tax-
wise if you plan on having revenue and profit. It does get expensive quickly
to do anything complex with your corporate structure as an LLC.

You need to be a C-corp to raise money from a venture capitalist.

Do it in Delaware or make sure your home state doesn't have an enormous
franchise fee.

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biztaxtalk
Forming your LLC or corporation in Delaware will not protect you from the $800
minimum state tax if your business is located in California.

