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Ask HN: LLC vs C-Corp? What about the State?

7 points by rumpelstiltskin ↗ HN
After doing some research, this is what I've come up with - it's better to start off as an LLC (they are simple to set up, avoid double taxation and still support multiple classes of stock if needed) and convert to a C-Corp later when we're ready to take funding (an LLC does not really allow for shareholders, so if we want outside investors, an LLC won't fly, in fact some VC firms have structures that do not permit them to invest in an LLC).

1. Does this make sense?

2. We're based in NYC, but I'm hearing that the cost of setting up an LLC can be 10x the cost of setting up a C-Corp. Any advice on the state to incorporate in? Why? (Assuming of course that we can incorporate in a diff state and work out of NYC)

13 comments

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kloncks
Incorporate in Delaware.

I'm going about a very similar route as well.

tansey
First off: http://startuplawyer.com/startup-issues/if-i-launched-a-star...

You aren't even mentioning an S-Corp. Is there some restriction that is keeping you from an S-Corp status? They also avoid double taxation while still giving the benefits of a corporation.

rumpelstiltskin
Actually, no, there is no restriction that's keeping us from an S-Corp. What advantages would an S-Corp give us over an LLC?
jonpaul
It's my understanding that:

1) If you don't intend for investment now, go for the LLC route so that you avoid double taxation.

2) If you want VC, you'll need a C-Corp as you noted.

For the weird states... you may want to register in Nevada or Deleware. However, the state you reside in may make you register as a foreign entity [which costs money], so in most cases in may just make sense to register in that state. YMMV.

For my second LLC, I registered in Nevada by using BizFilings. Very stupid, it cost much more than it needed to. For my third business, my partner just walked into my Secretary of State (Nebraska) and filled out the paper work. Very simple form. We were a business in less than 24 hours.

Again, YMMV depending upon the state. LLC is the most likely answer for most businesses to just get up and get going. Good luck.

honopu
Surprised no one has mentioned this, but it depends on your end-game, or what you are going after.

If you are looking to get funding, or are looking to build and sell the business, instead of making it a lifestyle business, you will definitely want to do a c-corp, issue your stock while it is worth nothing. If you get bought, you pay capital gains tax(hopefully long term) instead of taking the entire amount as income.

Aside from that you do have a few advantages of C-corp, but LLC is definitely the least amount of paperwork. LLC's can elect to be taxed as a c-corp and then an s-corp, at least the last I read.

But from what I have read almost everyone that gets vc has to be a delaware c-corp.

tzs
I see a couple Delaware recommendations, but no reasons given. That is because there generally aren't any good reasons to incorporate in Delaware over your home state unless you plan on being a large public company that gets sued a lot, or you are trying to impress investors who have more money than brains and will think that if you go Delaware like many giant companies do that will ensure you become giant.

The Delaware advantage is that their laws and court system are good for and good at handling large complicated litigation, like tricky M&As or complex shareholder suits. They make much of the state income from this, and charge accordingly. If your company is the kind that needs that, you would not be asking for advice here. If it doesn't need that, save the money. You can always reincorporate in Delaware later if needed.

camz
I'm a professional tax accountant and I deal with corporate reorganizations and giant pain-in-the ass org charts on a daily basis.

First understand what an LLC, S-Corp, and C-Corp are...

VCs prefer C-Corps because they provide the "best investment vehicle," there is no limit or rules to the ability of how you can split the shares. For example, a C-Corp allows you a variety of different classes of shares. Generally the only time this option is realistic is if you will be guaranteed a large source of income at least 200k plus or a huge influx of funding. Lastly, C-Corps are the most stable entities with the most case-law.

LLCs are agile, quick and lean. But, as an investment vehicle there are variety of problems that are related to tax and legal issues. Its great for a company that's starting out small, but you'll have to pay the self-employment tax on all earnings (15.3%).

S-Corps are awesome for small business as well because you avoid paying self-employment tax (15.3%). Theres a bit more paper work but if your bootstrapping then its definitely an awesome option.

I'm not going to get into all that much detail about the LLC and S-Corp but I did write a blog post of them with more detail at: <a href="http://www.thekenggroup.com/2010/04/26/incorporation-%E2%80%... and llcs</a>

Please note that if you incorporate in NYS, there a few quirks you should realize. First, you have to pay a fee here no matter what every year, used to be 300 dollars for city and state but they recently changed it to 100 dollars total. Also, NYC does NOT recognize the S-Corp status and they also consider an LLC an "unincorporated business" for taxes. Setting up shop in NY can be pricey in general, but if you're located here your going to have to pay these costs either way.

Lastly, Delaware is often cited because they have assloads of caselaw or guidance for how a legal issue is going to play out. Corps like certainty and Delaware provides that, more importantly, Delaware is majority ownership friendly. Delaware will generally side with the majority stockholder for any reasonable business decision.

Hope this helped.

rumpelstiltskin
So can we set up as an S-Corp in Delaware for the time being, and change to a C-Corp in Delaware when we're ready for VC funding?