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LLC: easy to setup, vesting/equity can be tricky, pass through taxes. C-Corp: harder (more expensive) to setup, vesting/equity relatively easy, double-taxation.

LLC: easy to setup, vesting/equity can be tricky, pass through taxes. C-Corp: harder (more expensive) to setup, vesting/equity relatively easy, double-taxation. If you can swing it, I think the "right" way would be to setup a C-Corp so you've got all your ducks in a row from the get-go -- you won't need to worry about restructuring if you ever add staff/funding in the future, one of you decides to leave, etc. If nothing else, I strongly recommend that you setup this new product outside the existing company that the consulting is done under. (I have direct experience with this as one of the companies I'm advising had to deal with this mess recently when they wanted to give out equity to employees, deal with investors, etc.)

person_b 16y ago
Hi paulsingh - thanks for the input. Agreed on setting it up outside the existing company that the consulting is done. If we did it in the C-Corp, do you have any advice for how to handle the equity? Do both founders vest into it over time? Not implying this would happen as both parties are relatively reasonable in this situation, but in situations where the companies aren't split equally, what's to prevent the majority stakeholder from diluting the minority stakeholder to nothing or to change the terms of the agreements themselves?
- paulsingh 16y ago
  Vesting: Absolutely, no questions about it. Everyone should vest -- this keeps someone from getting equity and immediately quitting (for example). You'll want to talk to a lawyer about anti-dilution provisions but I suspect that you'll want to make sure that the minority shareholder has voting rights to prevent situations like the one you describe. FWIW, this is a relatively "vanilla" type of situation. (You'll setup a new company, each of you will sign over the IP to the new product and then have equity stakes in this new entity.) Have a lawyer review all the docs before you sign them and this will be pretty straightforward -- please do yourself a favor and don't cut corners just to save a buck. :)

person_b 16y ago

Hi paulsingh - thanks for the input. Agreed on setting it up outside the existing company that the consulting is done. If we did it in the C-Corp, do you have any advice for how to handle the equity? Do both founders vest into it over time? Not implying this would happen as both parties are relatively reasonable in this situation, but in situations where the companies aren't split equally, what's to prevent the majority stakeholder from diluting the minority stakeholder to nothing or to change the terms of the agreements themselves?

paulsingh 16y ago
Vesting: Absolutely, no questions about it. Everyone should vest -- this keeps someone from getting equity and immediately quitting (for example). You'll want to talk to a lawyer about anti-dilution provisions but I suspect that you'll want to make sure that the minority shareholder has voting rights to prevent situations like the one you describe. FWIW, this is a relatively "vanilla" type of situation. (You'll setup a new company, each of you will sign over the IP to the new product and then have equity stakes in this new entity.) Have a lawyer review all the docs before you sign them and this will be pretty straightforward -- please do yourself a favor and don't cut corners just to save a buck. :)