4 ms·

LLC vs C-Corp, What should a startup go with?

13 points by mhidalgo 19y ago

deleted 19y ago
[deleted]
rms 19y ago
LLC is probably cheaper and easier and more flexible and better for you tax-wise if you plan on having revenue and profit. It does get expensive quickly to do anything complex with your corporate structure as an LLC. You need to be a C-corp to raise money from a venture capitalist. Do it in Delaware or make sure your home state doesn't have an enormous franchise fee.
- biztaxtalk 19y ago
  Forming your LLC or corporation in Delaware will not protect you from the $800 minimum state tax if your business is located in California.
nickb 19y ago
Are you an American citizen or a legal resident? Are your co-founders as well? If both answers are yes, go with S-corp instead of C-corp initially. Why? Well, it allows you easier filing, pass-through taxation (you won't get taxed twice like with C-corp) and best of all, you can easily convert S-corp into C-corp by filing a single form (if you ever raise VC funding). No VC will ever invest into LLC and converting LLC to a C-corp is a pretty involved (and expensive) process. If you're a foreign national or have a foreign national as a co-founder, you should go with C-corp.
- mhidalgo 19y ago
  I am an American citizen. Thanks for the info, its really confusing and there seems to be a lot of conflicting arguments on this matter. I am looking for outside investment not specifically VC, but probably eventually.
- deleted 19y ago
  [deleted]
  - nickb 19y ago
    Some valid points... A quick search came up with this: http://www.feld.com/blog/archives/2006/02/scorps_vs_llcs.html http://www.feld.com/blog/archives/2006/02/scorps_vs_llcs.htm... So, advice to the original poster, look into these things yourself and make up your mind. Ask a lawyer or an accountant... maybe they won't charge you for this advice.
    - Shooter 19y ago
      I think I was deleting my post as you were responding, Nick. I normally edit my posts instead of just deleting them, but in this case I didn't want the post to be hanging there while I was still editing. I realized a few things after I made my lazy, cut-and-paste post: 1. The audience on Hacker News is probably much more interested in 'flipping' their companies and taking VC money, in general, than most entrepreneurs. If one assumes a goal of flipping within the next 1-3 years, my (deleted) input has much less value. 2. UBTI is an issue with LLCs, as your Feld link cites. The thrust of my original post was for everyone to research what is best in their particular circumstances, but I muddied that point with my own corner case as an example. 3. I realized how great my accountants and attorneys are, and how long it took me to find them. I wouldn't advocate some of my past maneuvers unless one has a really competent advisor. Unfortunately, competent accounting and legal advisors are difficult to identify in advance...you usually identify bad advisors only after they have screwed you with their incompetence. To the OP, I would advise that you speak with a legal professional that specializes in small business and has a tax background. Preferably one that you find via a referral from another startup in your area. Entity formation is MUCH more complicated than most articles and forum posts would suggest. There are tons of tiny details that can cost you a great deal of time/money/control down the road if you don't get started on the right foot for YOUR particular circumstances. It is well worth investing a bit more time and energy in the beginning to save future headaches. Nolo.com has some decent books on deciding the appropriate business entity for your needs, although their books should not replace a consultation with a professional.
biztaxtalk 19y ago
What are your big concerns? Taxes or liability protection? If liability protection, the answer will vary by state but the corporation will usually give you better liability protection than an LLC. From a tax perspective, the IRS doesn't recognize the LLC as a business entity type. If you own a single-member LLC you'll be taxed as a sole-proprietor by the IRS & pay income and self-employment taxes on the net taxable income of your LLC. If your LLC has more than one member you'll be taxed as a partnership. An LLC can elect to be taxed as a corporation, either C or S. An advantage of the S Corp is the losses will flow to your personal return. This is likely to be most beneficial in the earlier years when you're pumping money into the company. As long as you have sufficient basis in the company, the losses are deducted from your ordinary income on your personal tax return. The taxation of LLCs vary by state too. Some states have a low franchise tax on LLCs. CA, on the other hand, has a $800 minimum tax on LLC (and corporations). The franchise tax in some states is based on gross revenues so be aware of that if you expect to have low-margin product. Take a look at http://www.biztaxtalk.com http://www.biztaxtalk.com for more on taxation of various entity types.
ajkates 19y ago
In most cases, I'd advise initially starting out as a Limited Liability Company of the state in which you reside. The main reason for this is that you (and your contributors) can get tax write-offs for investing in your startup. Also, it's much cheaper and easier to set up than a corporation, and provides a great deal of legal protection for your co-founders. There's really no reason to bother with an S-Corp, since an LLC essentially has all of the benefits and far less drawbacks. However, most VCs won't fund an LLC for a number of legal reasons. If your LLC is planning to pitch to VCs, I'd recommend incorporating (into a C-corporation) before doing so. Sure, it will cost you a few thousand dollars in legal fees and paper work, but I don't know of any VCs that don't require incorporation first. Also, I'd recommend incorporating in Delaware, since Delaware law is extremely forgiving to new startups. There's a reason why so many businesses are registered in that state...although, many startups have been incorporating in California recently as well.

13 points by mhidalgo 19y ago

deleted 19y ago

[deleted]

rms 19y ago

LLC is probably cheaper and easier and more flexible and better for you tax-wise if you plan on having revenue and profit. It does get expensive quickly to do anything complex with your corporate structure as an LLC. You need to be a C-corp to raise money from a venture capitalist. Do it in Delaware or make sure your home state doesn't have an enormous franchise fee.

biztaxtalk 19y ago
Forming your LLC or corporation in Delaware will not protect you from the $800 minimum state tax if your business is located in California.

nickb 19y ago

Are you an American citizen or a legal resident? Are your co-founders as well? If both answers are yes, go with S-corp instead of C-corp initially. Why? Well, it allows you easier filing, pass-through taxation (you won't get taxed twice like with C-corp) and best of all, you can easily convert S-corp into C-corp by filing a single form (if you ever raise VC funding). No VC will ever invest into LLC and converting LLC to a C-corp is a pretty involved (and expensive) process. If you're a foreign national or have a foreign national as a co-founder, you should go with C-corp.

mhidalgo 19y ago
I am an American citizen. Thanks for the info, its really confusing and there seems to be a lot of conflicting arguments on this matter. I am looking for outside investment not specifically VC, but probably eventually.
deleted 19y ago
[deleted]
- nickb 19y ago
  Some valid points... A quick search came up with this: http://www.feld.com/blog/archives/2006/02/scorps_vs_llcs.html http://www.feld.com/blog/archives/2006/02/scorps_vs_llcs.htm... So, advice to the original poster, look into these things yourself and make up your mind. Ask a lawyer or an accountant... maybe they won't charge you for this advice.
  - Shooter 19y ago
    I think I was deleting my post as you were responding, Nick. I normally edit my posts instead of just deleting them, but in this case I didn't want the post to be hanging there while I was still editing. I realized a few things after I made my lazy, cut-and-paste post: 1. The audience on Hacker News is probably much more interested in 'flipping' their companies and taking VC money, in general, than most entrepreneurs. If one assumes a goal of flipping within the next 1-3 years, my (deleted) input has much less value. 2. UBTI is an issue with LLCs, as your Feld link cites. The thrust of my original post was for everyone to research what is best in their particular circumstances, but I muddied that point with my own corner case as an example. 3. I realized how great my accountants and attorneys are, and how long it took me to find them. I wouldn't advocate some of my past maneuvers unless one has a really competent advisor. Unfortunately, competent accounting and legal advisors are difficult to identify in advance...you usually identify bad advisors only after they have screwed you with their incompetence. To the OP, I would advise that you speak with a legal professional that specializes in small business and has a tax background. Preferably one that you find via a referral from another startup in your area. Entity formation is MUCH more complicated than most articles and forum posts would suggest. There are tons of tiny details that can cost you a great deal of time/money/control down the road if you don't get started on the right foot for YOUR particular circumstances. It is well worth investing a bit more time and energy in the beginning to save future headaches. Nolo.com has some decent books on deciding the appropriate business entity for your needs, although their books should not replace a consultation with a professional.

biztaxtalk 19y ago

What are your big concerns? Taxes or liability protection? If liability protection, the answer will vary by state but the corporation will usually give you better liability protection than an LLC. From a tax perspective, the IRS doesn't recognize the LLC as a business entity type. If you own a single-member LLC you'll be taxed as a sole-proprietor by the IRS & pay income and self-employment taxes on the net taxable income of your LLC. If your LLC has more than one member you'll be taxed as a partnership. An LLC can elect to be taxed as a corporation, either C or S. An advantage of the S Corp is the losses will flow to your personal return. This is likely to be most beneficial in the earlier years when you're pumping money into the company. As long as you have sufficient basis in the company, the losses are deducted from your ordinary income on your personal tax return. The taxation of LLCs vary by state too. Some states have a low franchise tax on LLCs. CA, on the other hand, has a $800 minimum tax on LLC (and corporations). The franchise tax in some states is based on gross revenues so be aware of that if you expect to have low-margin product. Take a look at http://www.biztaxtalk.com http://www.biztaxtalk.com for more on taxation of various entity types.

ajkates 19y ago

In most cases, I'd advise initially starting out as a Limited Liability Company of the state in which you reside. The main reason for this is that you (and your contributors) can get tax write-offs for investing in your startup. Also, it's much cheaper and easier to set up than a corporation, and provides a great deal of legal protection for your co-founders. There's really no reason to bother with an S-Corp, since an LLC essentially has all of the benefits and far less drawbacks. However, most VCs won't fund an LLC for a number of legal reasons. If your LLC is planning to pitch to VCs, I'd recommend incorporating (into a C-corporation) before doing so. Sure, it will cost you a few thousand dollars in legal fees and paper work, but I don't know of any VCs that don't require incorporation first. Also, I'd recommend incorporating in Delaware, since Delaware law is extremely forgiving to new startups. There's a reason why so many businesses are registered in that state...although, many startups have been incorporating in California recently as well.