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C-corps are fairly uncommon nowadays and for good reason

This is a bit misleading for people looking to start your typical startup (using PG's definition of 'startup'). All those startups you read about raising money - want to know how many of them are C-corps? Just about 100%.

One thing that many people don't realize is that for many startups, those pass-through tax benefits of LLCs and S-corps are largely illusory, since they're not going to be profitable at that stage anyways.

Starting off as an LLC means you're going to introduce delay when you start raising money (unless you're really on top of things and convert in advance of fundraising), which introduces deal risk.

Yes, there is double taxation on income from C-corps, but most startup founders aren't in it for the salary / dividends, they're in it for the eventual acquisition / IPO (or these days, private market sales). Gains for QSB stock held more than 5 years are now tax-free under Section 1202.

There's a whole bunch of reasons why companies end up as corporations - not just the QSB stuff. Main street small businesses are often fine with LLCs or S-corps. Startups (as defined by PG) should really talk with an experienced startup attorney before going the route of an LLC or S-corp.

90% of my clients forming new businesses in the US last year chose the LLC form for legal purposes (only 1 client formed a new C-Corporation, which they did solely for legal requirements). They split 50/50 between pass-through and corporate treatment for tax purposes.

LLCs are relatively easy to convert to a C-Corporation, as are S-Corporations (which can automatically convert to C-Corporations). C-Corporations are generally very difficult and very expensive to convert to other forms.

So, C-Corporation status is great if you know that you will be getting VC funding. It's not so great if you only think you want VC funding, and it's a relative nightmare if you are trying to bootstrap.

You say starting off as an LLC means delay at fundraising. Unless you're advocating running entirely unincorporated, I think this is backwards: it is harder to convert your C corp to the form the investors will want than it is to convert an LLC. This was my understanding before last week, when YC's finance person confirmed it (at least as far as YC is concerned) on HN.

Thanks for pointing that out - I should have been more careful with my words. What I meant to say is that most startups will be better off starting as a C-corp, provided that they use market-standard paperwork (i.e. the forms that the major Silicon Valley law firms use, which many of them provide for free) and don't mess anything up (which is consistent with what Kirsty was saying). Of course, I suppose the "not messing anything up" part is harder done than said (which is why YC companies are lucky to have Kirsty) :)

YC will only invest in C-corps (though they'll help you convert if you're not one already).

Source: http://news.ycombinator.com/item?id=5193914

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