4 ms·

Legal Checklist for Startups

34 points by tzm 15y ago

porterhaney 15y ago
Curious on the Delaware part, that's the first I've heard that "all investors" are going to "require" a Delaware formation.
- DanielRibeiro 15y ago
  This not strictly true: they are not going to require it. But many of them will be so much more more happy with you.
- mattmanser 15y ago
  It's mentioned in virtually every single post about incorporating in America. It even has it's own mention on Delaware's wiki page: http://en.wikipedia.org/wiki/Delaware#Incorporation_in_Delaware http://en.wikipedia.org/wiki/Delaware#Incorporation_in_Delaw...
- tzm 15y ago
  Also it appears to be easier to convert via a one-step “conversion” process rather performing than a reverse merger. http://www.feld.com/wp/archives/2006/03/entity-conversions-in-delaware-just-got-easier.html http://www.feld.com/wp/archives/2006/03/entity-conversions-i...
tptacek 15y ago
I think the LLC advice is questionable. 1. It's true that institutional VC isn't going to invest in an LLC. It's also part of the C.W. that institutional VC isn't going to invest in your C Corporation either; there's going to be thousands of dollars spent in restructuring your corporation one way or the other. It's probably not true that having an LLC is going to prevent you from getting an investment. If you're worth a VC round, you'll get a VC round; it's just a question of how much of that round will go to legal fees. 2. The tax issues for LLCs aren't particularly complex. In fact, tax simplicity is one of the reasons LLCs exist. If your LLC is paying you --- you're post-revenue --- you need an accountant. Don't DIY your taxes. I've done dumb things with taxes before. Learn from my errors: it's not worth the heartache to blow off your taxes. Just get an accountant. 3. There are common constructs used to grant equity to LLC employees (I believe they're formally "restricted stock units", but, ask your lawyer --- who you certainly needed to engage if you were building a C Corp). The bigger issue to my mind is the fact that the founders of an LLC, formally "principals", "owners", or "partners", technically aren't supposed to take W2 income, which makes taxes trickier. Against all of this complexity just note that an LLC is way easier to set up than a C Corporation, and if it's between an LLC now and a C Corporation "sometime soon but not quite yet", please remember that the benefits of incorporating are significant: * You are unlikely to lose your house in a contract dispute. * You can invoice and be invoiced. * Big companies will have a harder time rolling you into letting them withhold taxes for you when they pay you.
- rprasad 15y ago
  You can always organize as an LLC and "check the box" (make an entity classification election) within 75 days to have the LLC treated as a corporation for tax purposes.
  - tptacek 15y ago
    I'm pretty sure you can elect for S Corporation treatment any time (I don't know if it costs more later on, I just know that we did it only within the last few years).
mattmanser 15y ago
Legal Checklist for American Startups. ftfy.

34 points by tzm 15y ago

Curious on the Delaware part, that's the first I've heard that "all investors" are going to "require" a Delaware formation.

DanielRibeiro 15y ago
This not strictly true: they are not going to require it. But many of them will be so much more more happy with you.
mattmanser 15y ago
It's mentioned in virtually every single post about incorporating in America. It even has it's own mention on Delaware's wiki page: http://en.wikipedia.org/wiki/Delaware#Incorporation_in_Delaware http://en.wikipedia.org/wiki/Delaware#Incorporation_in_Delaw...
tzm 15y ago
Also it appears to be easier to convert via a one-step “conversion” process rather performing than a reverse merger. http://www.feld.com/wp/archives/2006/03/entity-conversions-in-delaware-just-got-easier.html http://www.feld.com/wp/archives/2006/03/entity-conversions-i...

tptacek 15y ago

I think the LLC advice is questionable. 1. It's true that institutional VC isn't going to invest in an LLC. It's also part of the C.W. that institutional VC isn't going to invest in your C Corporation either; there's going to be thousands of dollars spent in restructuring your corporation one way or the other. It's probably not true that having an LLC is going to prevent you from getting an investment. If you're worth a VC round, you'll get a VC round; it's just a question of how much of that round will go to legal fees. 2. The tax issues for LLCs aren't particularly complex. In fact, tax simplicity is one of the reasons LLCs exist. If your LLC is paying you --- you're post-revenue --- you need an accountant. Don't DIY your taxes. I've done dumb things with taxes before. Learn from my errors: it's not worth the heartache to blow off your taxes. Just get an accountant. 3. There are common constructs used to grant equity to LLC employees (I believe they're formally "restricted stock units", but, ask your lawyer --- who you certainly needed to engage if you were building a C Corp). The bigger issue to my mind is the fact that the founders of an LLC, formally "principals", "owners", or "partners", technically aren't supposed to take W2 income, which makes taxes trickier. Against all of this complexity just note that an LLC is way easier to set up than a C Corporation, and if it's between an LLC now and a C Corporation "sometime soon but not quite yet", please remember that the benefits of incorporating are significant: * You are unlikely to lose your house in a contract dispute. * You can invoice and be invoiced. * Big companies will have a harder time rolling you into letting them withhold taxes for you when they pay you.

rprasad 15y ago
You can always organize as an LLC and "check the box" (make an entity classification election) within 75 days to have the LLC treated as a corporation for tax purposes.
- tptacek 15y ago
  I'm pretty sure you can elect for S Corporation treatment any time (I don't know if it costs more later on, I just know that we did it only within the last few years).

mattmanser 15y ago

Legal Checklist for American Startups. ftfy.