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Is it true that you may enter the funding cycle as an LLC but that as a practicality you won't exit funding as anything but a C, that angels and VCs will insist

Is it true that you may enter the funding cycle as an LLC but that as a practicality you won't exit funding as anything but a C, that angels and VCs will insist on this restructuring? I think the answer is yes but I don't know. Can someone price the cost of converting a Delaware LLC to the C structure that VCs will expect? I think (again, I don't know) that we're talking about a couple of grand of post-money lawyer time. Early stage startup founders have a lot on their plates. Getting this nuance right to save a few bucks will cost some upfront neurons and some time for something which is ultimately procedural. The OP suggests that we mentally work through this ahead of time and I see the point. But it's like priced equity vs SAFE. It requires a lot of upfront neuron work. The LLC vs C tax issue seems to be a bit of a canard. You most likely won't have any profits to tax this early and you won't exit funding as an LLC. Anyways, as the Zuckerberg Florida LLC example shows, you can get these things slightly wrong and still move forward. Getting something infinitely right will guarantee that you will never move forward.

chimeracoder 10y ago
> Is it true that you may enter the funding cycle as an LLC but that as a practicality you won't exit funding as anything but a C, that angels and VCs will insist on this restructuring? I think the answer is yes but I don't know. There's never any hard-and-fast rule in the startup world, but pretty much any VC will want you to be a C-corp instead of an LLC. (You're unlikely to get refused funding just because your company is an LLC, but they'll likely want you to restructure before the deal finalizes).
pdshrader 10y ago
Startup/Venture Capital lawyer here (but not your lawyer). Agreed with chimeracoder below. As for cost, a few grand is a good minimum estimate, but it really depends on the complexity. If you've been around as an LLC for a while, you may have different types of equity that has been issued (e.g. profits interests), which will complicate the conversion process a bit. Your lawyer will also have to review the LLC's operating agreement to make sure there aren't any funky protective provisions or oddities that will complicate the conversion. Unlike most Delaware C-corp charters in the startup world, LLC operating agreements are extraordinarily flexible and variable documents, so it's a custom review almost every time we have to go through one of these conversions.
- Berry2017 10y ago
  After reading all the comments about C Corp vs. LLC, I am thinking to start my business as LLC and when the time comes that business is on the right track and I have investors willing to invest, convert the LLC to C Corp at that point. I live in New Jersey. My startup is e-commerce business which will deliver goods to anywhere in US. And initially I will not need any physical office - I will run my business from my home. It will require for me to ship goods from my garage, but I will not have employees or office until at least a year, if the business succeeds. My questions: 1) Do I need to establish my startup in Delaware or is it enough to just register it as LLC in New Jersey? 2) If some of you say I should register in Delaware, then my question becomes do I need to register NJ as foreign qualification as well? Or is that ok to just have Delaware only until I need an office space and have employees in NJ - only at that time establish foreign qualification in NJ. I have made some research but not clear to me if it is safer to establish the NJ LLC as foreign qualification (in case I am recommended to establish the business in Delaware) even if I run the business initially from home but provide my service to customers across US. I appreciate any advise.

chimeracoder 10y ago

> Is it true that you may enter the funding cycle as an LLC but that as a practicality you won't exit funding as anything but a C, that angels and VCs will insist on this restructuring? I think the answer is yes but I don't know. There's never any hard-and-fast rule in the startup world, but pretty much any VC will want you to be a C-corp instead of an LLC. (You're unlikely to get refused funding just because your company is an LLC, but they'll likely want you to restructure before the deal finalizes).

pdshrader 10y ago

Startup/Venture Capital lawyer here (but not your lawyer). Agreed with chimeracoder below. As for cost, a few grand is a good minimum estimate, but it really depends on the complexity. If you've been around as an LLC for a while, you may have different types of equity that has been issued (e.g. profits interests), which will complicate the conversion process a bit. Your lawyer will also have to review the LLC's operating agreement to make sure there aren't any funky protective provisions or oddities that will complicate the conversion. Unlike most Delaware C-corp charters in the startup world, LLC operating agreements are extraordinarily flexible and variable documents, so it's a custom review almost every time we have to go through one of these conversions.

Berry2017 10y ago
After reading all the comments about C Corp vs. LLC, I am thinking to start my business as LLC and when the time comes that business is on the right track and I have investors willing to invest, convert the LLC to C Corp at that point. I live in New Jersey. My startup is e-commerce business which will deliver goods to anywhere in US. And initially I will not need any physical office - I will run my business from my home. It will require for me to ship goods from my garage, but I will not have employees or office until at least a year, if the business succeeds. My questions: 1) Do I need to establish my startup in Delaware or is it enough to just register it as LLC in New Jersey? 2) If some of you say I should register in Delaware, then my question becomes do I need to register NJ as foreign qualification as well? Or is that ok to just have Delaware only until I need an office space and have employees in NJ - only at that time establish foreign qualification in NJ. I have made some research but not clear to me if it is safer to establish the NJ LLC as foreign qualification (in case I am recommended to establish the business in Delaware) even if I run the business initially from home but provide my service to customers across US. I appreciate any advise.