4 ms·

Agreed. The primary issue with an S-to-C conversion is that any assets with built-in-gain (i.e., worth more now than when they were acquired) may result in "imm

by rprasad 15y ago

Agreed. The primary issue with an S-to-C conversion is that any assets with built-in-gain (i.e., worth more now than when they were acquired) may result in "immediate" income to the corporation. This is not an issue for most startups, unless they start off spending lots of money (i.e., Color). (Also, "immediate" in tax world really just means they'll be part of that year's income.) The conversion itself is otherwise tax-free at the federal level, and in most (but not all) states. LLCs, however, are a frigging nightmare. They're the most difficult form of business entity to set up (except for non-profit 501(c)(3)'s). Accounting for LLCs will require an experienced (expensive) accountant. Plus, state laws on LLCs aren't uniform in the states that matter.

tptacek 15y ago
That hasn't been my experience with LLCs. If you're making money and you're a founder, you need an accountant full stop. But having said that: you make distributions, and the principals pay self employment tax. Where's the big deal? Here's where I get jumpy on this stuff: S- and C- corporations are complex enough to put people off until they get a lawyer. Most startup founders probably don't have a lawyer when they start. When you say "LLCs are a nightmare", besides the fact that they're aren't for most people (they aren't even notably complicated for most people; that's the point), and that it's not that hard to switch out of an LLC when things get complicated (by that point, you have a lawyer)... ... besides those things, you're also probably effectively talking people out of incorporating at all. That's more than suboptimal; it's dangerous. It creates situations where you can be personally liable for all sorts of company expenses. We've had HN posts from people who were told by cofounders and business partners that they were personally liable for huge expenses, and had those same people discovered they owed zero because they were incorporated. Don't do business as a sole proprietor. Get a structure with limited liability as soon as you can. If it's between an LLC now and an S-Corp "maybe 6 months from now, maybe earlier if we can find a good lawyer and we're making money" --- do the LLC. You're the expert here. Where am I wrong in this analysis?
tptacek 15y ago
Freaky. People. Guy's a lawyer. Don't mod him down on a legal comment. Jeepers.
sdizdar 15y ago
I wonder why would somebody go with S-corp instead of C-corp if they plan to be big (meaning raise money)? Majority of startups will not have enough of profit to pay founders at the beginning, so tax advantage does not look very appealing.
bane 15y ago
LLCs, however, are a frigging nightmare. They're the most difficult form of business entity to set up (except for non-profit 501(c)(3)'s). Accounting for LLCs will require an experienced (expensive) accountant. Plus, state laws on LLCs aren't uniform in the states that matter. Funny, setting up our LLC took about 20 minutes of filling out forms and mailing them in. I've heard it's different state-to-state, but in the state we set up in (Virginia) it was not terribly harder than buying a new cell phone...and less money.

by rprasad 15y ago

tptacek 15y ago

That hasn't been my experience with LLCs. If you're making money and you're a founder, you need an accountant full stop. But having said that: you make distributions, and the principals pay self employment tax. Where's the big deal? Here's where I get jumpy on this stuff: S- and C- corporations are complex enough to put people off until they get a lawyer. Most startup founders probably don't have a lawyer when they start. When you say "LLCs are a nightmare", besides the fact that they're aren't for most people (they aren't even notably complicated for most people; that's the point), and that it's not that hard to switch out of an LLC when things get complicated (by that point, you have a lawyer)... ... besides those things, you're also probably effectively talking people out of incorporating at all. That's more than suboptimal; it's dangerous. It creates situations where you can be personally liable for all sorts of company expenses. We've had HN posts from people who were told by cofounders and business partners that they were personally liable for huge expenses, and had those same people discovered they owed zero because they were incorporated. Don't do business as a sole proprietor. Get a structure with limited liability as soon as you can. If it's between an LLC now and an S-Corp "maybe 6 months from now, maybe earlier if we can find a good lawyer and we're making money" --- do the LLC. You're the expert here. Where am I wrong in this analysis?

tptacek 15y ago

Freaky. People. Guy's a lawyer. Don't mod him down on a legal comment. Jeepers.

sdizdar 15y ago

I wonder why would somebody go with S-corp instead of C-corp if they plan to be big (meaning raise money)? Majority of startups will not have enough of profit to pay founders at the beginning, so tax advantage does not look very appealing.

bane 15y ago

LLCs, however, are a frigging nightmare. They're the most difficult form of business entity to set up (except for non-profit 501(c)(3)'s). Accounting for LLCs will require an experienced (expensive) accountant. Plus, state laws on LLCs aren't uniform in the states that matter. Funny, setting up our LLC took about 20 minutes of filling out forms and mailing them in. I've heard it's different state-to-state, but in the state we set up in (Virginia) it was not terribly harder than buying a new cell phone...and less money.