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This is not legal advice.

The article focuses on a very small tax issue that should not be determinative of business structure. The way a Start-up should decide to form a business generally should be as follows:

1. State - generally always choose the State the Founder is physically located. If you choose Delaware or another State you are not physically located, you must "qualify" your business to do business in every State you have a physical presence - failure to qualify may negate any protections offered by the business structure.

2. Structure -(Corp (S or C) vs LLC) This is determined on a two part analysis: First, I start with liability, CPAs typically only look at the tax issue, you want to ensure the Founder(s) will not be liable for business debts and the business can not be liable for Founder's personal debts. Example, I would always advise against a "single member" LLC because an LLC is considered a Partnership, thus Courts will not enforce Partnership protection where there are no Partners (ie, single member) and the LLC can be liable for Founder's personal debts - on the other hand a CPA will usually recommend single member LLCs because they are taxed like a sole proprietorship(make filing taxes really easy). Second, should be the tax issue, if multiple Founders I suggest LLC, especially when there are foreign Founders, if it is a single Founder then I suggest Corp. and S status if qualified.

3. Cost- This should never be determinative but taken into consideration. The cost of forming/qualifying Corp and LLC can vary greatly among the States. Additionally, compliance (annual reports, state taxes) among the States can vary as greatly as well as the cost of compliance and the penalties for failure to timely file can be very costly.

I know the word in SV is that Start-ups must be C-Corps incorporated in Delaware in order to receive funding. My thought is that if a Start-up is already incorporated/organized and has not received funding the Founders can easily: 1. "Domesticate" their business entity to Delaware, if an LLC perform a Conversion to a C-Corp., or 2. Dissolve and have the investors attorney's draft the new Delaware Articles of Incorporation.

As to the tax issue discussed I did not notice the article discuss that an LLC can be taxed as a C-Corp and if qualified elect S status. Also, playing the game of minimizing salary and maximizing distributions, while obviously beneficial because an owner only pays payroll and FICA on salary not on distribution, becomes a dangerous game that may result in the IRS knocking on the door. However, to the best of my knowledge the IRS has only ever gone after S-Corporations in such situations and have not set a precedent of going after LLCs.




> Example, I would always advise against a "single member" LLC because an LLC is considered a Partnership, thus Courts will not enforce Partnership protection where there are no Partners (ie, single member) and the LLC can be liable for Founder's personal debts

This is not true. A single-member LLC gets the benefit of the personal liability shield.

However, as with any limited liability form, you can get the liability shield pierced if you don't properly organize and operate the LLC.

Because a single-member LLC has only one member, it might more likely to get the liability shield pierced since there isn't more than one party watching the documents and "formalities." (I put formalities in quotes because LLCs have very few formalities).

Source: Advising Small Business by Steven Alberty, Section 7:17.


>Source: Advising Small Business by Steven Alberty, Section 7:17.

Not to be condescending but good luck citing that in Court.

>>Example, I would always advise against a "single member" LLC because an LLC is considered a Partnership, thus Courts will not enforce Partnership protection where there are no Partners (ie, single member) and "the LLC can be liable for Founder's personal debts"

Re-read what you quoted, specifically focus on, "the LLC can be liable for Founder's personal debts". Your response: This is not true. A single-member LLC gets the benefit of the personal liability shield. Allow me to return favor and say "this is not true." While the Owner of a single member LLC may be protected against the LLC liabilities, that same LLC can be liable for the personal debt/judgments of the single member Owner.

The Florida Supreme Court recently issued the Olmstead v. Federal Trade Commission case. The case's holding is that F.S. 608.433 (4) allows a court to order a debtor to surrender "all right, title, and interest" in the debtor's single-member LLC to satisfy an outstanding judgment, unlike many other states where the sole remedy is a charging order.


> Example, I would always advise against a "single member" LLC because an LLC is considered a Partnership, thus Courts will not enforce Partnership protection where there are no Partners (ie, single member) and the LLC can be liable for Founder's personal debts

Is this actually true? I keep reading stuff like this on the Internet, but the corporate law textbook "corporations" by Alan Palmiter indicates otherwise. It would be nice if people qualified their opinion by referencing actual cases or studies.


Olmstead v. Federal Trade Commission

http://www.floridasupremecourt.org/decisions/2010/sc08-1009....


Agreed, it's a good thing the article is not legal advice because it's got so many basic errors that it would constitute actionable legal malpractice.

To clarify: an LLC means a "limited liability company" so the owners have limited liability. Their loss is limited to their investment. If the corporation's debts/losses exceed their investment, they don't have to pay those debts/losses out of pocket. The exception is the "piercing the veil" doctrine, which applies where the LLC is not being run as a separate business entity, i.e., it is financially or legally not treated as an independent entity by its investors, i.e., because they never have organizational meetings or they do not maintain separate bank accounts for the LLC. This risk is greatest with single-person LLCs, but can happen with any LLC.


>Agreed, it's a good thing the article is not legal advice because it's got so many basic errors that it would constitute actionable legal malpractice.

I would have simply said read the reply to the post above, but your so out of line that it needs to be addressed. Your copy/paste "analysis" only examines liability of the single member Owner for the LLC liabilities. What about the company being liable for the owner's liabilities? If you are a single member owner and have personal debts/judgments, the debtors/judgment holders can not only take economic interest in your business but actual equity (ownership).

"it's got so many basic errors that it would constitute actionable legal malpractice." First, you clearly do not know the elements of legal malpractice. Second, if you actually read my post, I made it clear a single member Owner is protected from LLC liabilities.

Any thing else you think is an error?

The Florida Supreme Court recently issued the Olmstead v. Federal Trade Commission case. The case's holding is that F.S. 608.433 (4) allows a court to order a debtor to surrender "all right, title, and interest" in the debtor's single-member LLC to satisfy an outstanding judgment, unlike many other states where the sole remedy is a charging order.




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