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It's pretty quick to set up a C-Corp too—it's much, much more annoying to change the LLC into a C-Corp when you do want to fundraise.
by andrew_gust 10y ago
It's pretty quick to set up a C-Corp too—it's much, much more annoying to change the LLC into a C-Corp when you do want to fundraise.
- tptacek 10y agoI've never done that, but that's not the advice I've gotten from lawyers. In particular, what I've been told is that C-Corp or LLC, there's going to be annoying conversion work at your first VC round.
- andrew_gust 10y agoHmm, I'm not sure that's accurate. What would you be converting to if your company was already a C-Corp?
- tptacek 10y agoA C-Corp with the structure your venture capital firms expect.
- andrew_gust 10y agoPart of the premise of Gust Launch is that it's far simpler to start this way, as a Delaware C-Corp with expected structure, than it is to convert later. The conversions range from easy to extremely painful but they're almost all avoidable.
- koolba 10y agoThere may be more structure required but starting off from a C corp obviates the need to transfer control of assets (particularly intangible ones like copyrights to source code).
- tptacek 10y agoYou're paying a substantial amount of money up front to hypothetically mitigate a hypothetical future expense that only occurs at the point where cash flow (at least on the order of "covering legal expenses") stops being an issue. That doesn't sound like a good deal to me, but that's just, like, my opinion, man.
- koolba 10y agoQuantify substantial. Last time incorporated a Delaware C corp it cost me a couple of stamps and filing fees. I don't remember exactly but it definitely wasn't an obscene number. The annual upkeep, including franchise tax and registered agents, is around $600. If you're not going to have a nexus in another state (i.e. No physical location or storefront) then that's peanuts for having a corporate vehicle in the the state for corporate vehicles. If the cost difference of a couple hundred bucks is enough to break your bank, I'd suggest finding a 9-5 job rather than incorporating.
- amyjess 10y agoCan you elaborate? Operational and structural details like this have always fascinated me.
- edoceo 10y agoI just went through this. Started as LLC with co-founders. Once we started seeking money we up-scaled to C-Corp - give the lawyer a few bucks, wait a week, sign some stuff. Mostly painless. Going to a C-Corp too early can be costly, moving up from a proven model LLC is easy, limits cost and risk
- nostrademons 10y agoWhy not use Clerky? It's about a grand all-in, and since YCombinator uses them for all their incorporations, it's what all your investors are likely to expect.
- tvladeck 10y agoThis is not true. It's very easy to convert from LLC to C corp but not vice versa. As a general rule it's easy to go from flow-thru entities to tax paying entities but not vice versa. This asymmetry of irreversibility, combined with the fact that most startup exits are asset, not stock, sales, makes the thesis of your post incorrect.
- pdshrader 10y agoSure, as a general rule, but conversions from LLCs to C corps can get very complicated as well in short order, especially when there have been different types of equity issued to founders/employees (e.g. profits interests, convertible notes, etc.). If the cap table is sufficiently large, it can cause ballooning legal costs pretty quickly. Not outrageously so, but companies can expect at least a few thousand to get added to the bill.
- tptacek 10y ago... which is roughly how much money it'll cost to have a good lawyer carefully set up a C-Corp for you.
- andrew_gust 10y agoThis is exactly the part of the process that the first iteration of Gust Launch solved. All the paperwork for incorporation and company formation are streamlined and pretty easy to fill out, and included in the monthly cost. So conversion is much, much more expensive.
- Nullabillity 10y agoSo it's "a few thousand" when/if the need arises vs, at a minimum, $2.4k/yr definitely. That doesn't sound clear-cut at all.
- andrew_gust 10y ago
- kcdev 10y agoWhen it is time for fundraising, is it possible to just create a new C-Corp, then sell the assets of the LLC to the C-Corp? Are there major tax implications? Is it possible to sell the assets for a $1? Or would that be in violation of some tax rule?
- edoceo 10y agoIt's easy. Or the C-Corp owns the LLC, or IP assignment. Just move the assets over, not an actual sale.
- tedunangst 10y agoIf you buy something for less than it's worth, you have to book the difference as income. Not much difference between buying $1000 widget for $1 and buying it for $1000 and then getting paid $999.
- jasode 10y agoAs one example, the first Facebook business entity was a Florida LLC. Mark Zuckerberg then created a new Delaware based C-Corp that bought the IP from the LLC. I believe the original trigger for converting to a C-Corp was the Peter Thiel investment.
- uiri 10y agoNo cash is needed to sell the assets or LLC to the C Corp. Most likely, you would sell the assets of the LLC to the C Corp in exchange for some number of shares (valued at the pre-money valuation of the company) and then issue additional shares equal to the VC money such that the total value of the new C Corp is the post-money valuation. Afterwards, the founders can distribute the shares and wind up the LLC. The alternative is for the founders to sell the LLC to the C Corp for shares and then the C Corp can wind up the LLC.
- nthj 10y agoI'm asking out of curiosity (e.g. I have no need to pay a lawyer or CPA to answer this): Would the founders have to potentially, or always, pay taxes on the conversion? Seems like the sale of the LLC or the assets could be recognizable gain.