8 ms·
If you're just starting out, the worst decision you can make is to incorporate as a C-corp. An LLC makes vastly more sense, even for the tiny proportion of comp
by tvladeck 10y ago
If you're just starting out, the worst decision you can make is to incorporate as a C-corp. An LLC makes vastly more sense, even for the tiny proportion of companies that want VC funding (and specifically institutional funding - funding from other sources would not matter as much - I'll explain why below). Stripe Atlas really ought to make the default an LLC.
The two major reasons why:
1. When you're a C-corp, you pay taxes twice. Once at the corporate level, and once at the individual level. This matters both for ongoing income but also for any liquidation event - as most liquidation events are asset, not stock, sales, you're getting taxed twice here too.
2. You can go from LLC -> C-corp easily but not the reverse. Why would you make the decision before you have to? Start as an LLC. In the very unlikely event you are taking institutional funding you can convert; in most cases, you'll happily stay as an LLC and keep the extra tax dollars you'd be giving the government.
Finally - all this business that VCs prefer to invest in Delaware C corps because of the legal knowledge there is - sorry - bullshit. They do it because they have to invest in taxed entities, because they themselves are partnerships so their interest in any flow-through entity will flow up to their investors, some of which are non-profits. Non-profits, like pensions, risk losing their non-profit status if they have unrelated business taxable income. There is a solution here, which is to have a special purpose blocker corp that sits in between the VC partnership and the LLC. This is done all the time in private equity but not in VC and there is no principled reason why not.
So there you have it. Don't do Stripe Atlas because you're forcing yourself to make a decision you don't need to make right now, that's irreversible, and that may end up costing you a lot of money.
IANAL, but I am a Wharton MBA
- nodesocket 10y agoI currently have a California LLC (single founder) not looking to raise VC. While the LLC has been nice because it greatly simplifies taxes, do be aware there is a mandatory $800 tax every year (no matter how much revenue you make). The $800 tax sucks, because when you're just starting out, $800 a year can be painful if your startup is making less than $1,000 a month.
- dublinben 10y agoIf you're interested in reducing taxes, you shouldn't have incorporated in California. Quite a few other states have no such minimum taxes.
- ageitgey 10y agoCA knows that. Which is why if you register in another state, they will just charge you an $800 foreign corporation fee instead. CA is pretty good at making sure they get their money from you.
- cookiecaper 10y agoYes. California has carte blanche because so many people want to be there (it is by far the most populous state with 40 million residents). They're not worried about keeping people or businesses in-state and it shows.
- fapjacks 10y agoCalifornia has labor laws preferential to employees (e.g. not enforcing non-competes, the "your side projects belong to you if you aren't using your employer's resources"), but the minute you want to take one of those side projects into the business realm, California murders it on the spot. Pretty ridiculous.
- nodamage 10y agoIf you live in California you have no choice. Even if you incorporate in a foreign state, you'll also need to register your foreign corporation in California.
- rubicon33 10y agoI find that tax to be obnoxious. I wouldn't mind paying it AFTER the business has had a chance to breath, but that's a hefty chunk of change to present up front, without ever having done business. I'm sure my frustration stems from not understanding WHY they charge it, when they do... If anyone could enlighten me, I would appreciate!
- jayjay71 10y agoI started my company as an LLC. Since it began in Pennsylvania, I registered as a PA LLC. Welp, I applied to Y Combinator and they accepted me, but it turns out they won't invest in LLC companies. I figure, no biggie, I'll just convert to a DE C Corp as I'd been planning to do eventually anyway. It turns out this isn't so simple for dissolving a PA LLC, and it is a several month process. I almost wasn't accepted into Y Combinator as a result because they aren't going to wait several months before making their investment, and was only able to attend because a very experienced lawyer found a loophole to convert my company into a PA C Corp. I am still suffering headaches from this, even after my company shut down, because of all sorts of bizarre issues of being a PA C Corp. And since nobody knows anything about PA C Corporations, I can't use standard documents and legal advice is particularly expensive (and usually not the best). Corporate law isn't always so cut and dry.
- serge2k 10y agoWhy couldn't you start a new DE C corp instead of converting?
- jayjay71 10y agoThey insisted the previous corporation had to first be dissolved. I am not a lawyer, but I believe this is just standard practice. I suppose it's because there can be objections from investors in the original LLC if you take money in a new entity, and in very bad situations (which are probably very unlikely) that could lead to lawsuits. I think lawyers are just trying to do things properly to avoid these sorts of things.
- tomhoward 10y agoin very bad situations (which are probably very unlikely) that could lead to lawsuits The thing is, the more successful your company turns out to be, the more likely it is there'll be lawsuits. Recent prominent case in point: Cruise Automation [1] [1] http://www.strictlyvc.com/2016/04/17/a-strange-new-battle-begins-over-who-owns-cruise-automation/ http://www.strictlyvc.com/2016/04/17/a-strange-new-battle-be...
- rrggrr 10y agoThis advice is wrong. A C-corp deducts officer salaries. Officer salaries are not taxed twice in the manner the OP states. Assuming there are any profits that remain after officer salaries, and assuming those profits are not kept in the business as retained earnings, and assuming the company decides to pay those profits as dividends, then they are taxed twice. A C-corp can provide a clear separation between business and business owner(s); and among various owners. Ask an attorney what to set-up and be clear with them where you think/hope your company is headed. UPDATE: Its not that other structures don't provide this, its that OPs characterization of C-Corp structure isn't right.
- tvladeck 10y agoBoth of the points you brought up are not specific to c corps. Any company will list salaries as an expense on the P&L, and an LLC also provides a layer of protection between "business and business owner(s)". The first two Ls stand for Limited Liability...
- beachstartup 10y agoowners generally do not pay themselves large officer salaries, because of the w-2 tax rates which can be extremely high in a state like california. this also muddies up the discretionary compensation numbers when a potential buyer comes along and assesses the P&L on the company. this w-2 income is also taxed twice -- the state takes its cut with payroll taxes and unemployment/disability insurance. if you add sales tax into the mix, an owner is paying upwards of 50% taxes on this money if he decides to buy something nice -- not smart. to get non-payroll money out of a c-corp and into the owners' pockets, it will be taxed twice, first as corporate income and then as dividend income on the individual owners' tax return. if you have a way around this that doesn't involve laundering money offshore or to shell companies, i'm all ears. for a smaller, closely held private company with no institutional investors, an LLC taxed as a partnership or something similar (not an s-corp) will yield a lower effective tax rate for the owners of the company and more closely represent what actually is going on. investors want to invest in a delaware c-corp usually because all of the laws and case precedence are favorable to them.
- 10y ago
- danieltillett 10y agoFor the benefit of Australians reading this post a corporation (pty ltd) is a very good idea. The lower taxation (28.5%) and franking credits on any tax paided make it the way to go.
- tptacek 10y agoMy further understanding is that most people's C-corps have to altered at institutional funding rounds at expense comparable to converting an LLC.
- morgante 10y ago> When you're a C-corp, you pay taxes twice. You can be a C-corp and elect for S-corp taxation (which will allow for flow-through taxation). The advantage of this is that S-Corp status can be revoked easily.
- arikrak 10y agoLLC's can have more fees, such as in New York. A company rarely needs to worry early on about earning more revenue than it can pay out in salaries, so I'm not sure how often a C-Corp will become a problem.
- weavie 10y agoIs it just my ignorance - or is this all much simpler in the UK? I think we just have Sole Trade -> Private Limited -> Public Limited and not much other variation. Generally anyone starting up will have the choice between Sole Trade (you are personally liable for the companies debts) and Private Limited (you are not personally liable, but have more regulations to abide by such as you have to submit accounts to Companies House.)
- GordonS 10y agoThere is Partnership too, but yes, getting setup as anything other than a public company is very simple.
- dboreham 10y agoNote that you only "pay tax twice" on income left in the corp to be subject to tax, then later paid to yourself as salary. You can elect not to do that (e.g. pay any residual profit each year to yourself as a bonus) so it is absolutely not generally true that income is double taxed. Source: owned several companies over the past 15 years, at least one of each type of USA legal entity: LLC, S-corp, C-corp. The reasons to select one entity type over another are many and subtle. Consult your lawyer and accountant for advice (and only act on it if they both agree).
- gamblor956 10y agoNot sure who told you that but it's completely wrong. Corporate income is taxed twice in the following sense: once when earned by the corporation, and again to the owner when received as a dividend out of the corporation's profits. Salary paid to officers/employees is only taxed once, because it is treated as an expense to the corporation and thus only taxable to the recipient. Most small businesses avoid this as much as possible because individual tax rates are usually higher and salary payments incur SSI/payroll taxes.
- king_kerr 10y agoAwesome and informative. Never understood the whole VCs investing in Delaware C Corps deal but your explanation makes sense to me.
- TACIXAT 10y agoAfter a ton of research I went Delaware S corp. I figured if I was ever going to get investors (ha, probably won't), I'd need a C corp. It seemed like S corp had the same tax benefits as the LLC but could be converted very easily to a C corp.