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Ask HN: How messy is it to re-incorporate an LLC into a C-Corp later?

7 points by nathansobo ↗ HN
I have heard converting an LLC into a C-Corp described as "messy" by several people on HN in different threads. If I am the sole shareholder of the LLC, can't I just close it and transfer the assets (which would probably just be my code) to the new C-Corp? How messy is it? Is it manageable by a decent lawyer, because I'll need that anyway when I start taking investment.

Longer version, with more background:

I have a site off the ground, but potential customers are balking at the lack of a terms of service. So I need to set up some sort of corporation. The agile programmer in me says set up an LLC. It's the simplest thing that could possibly solve this problem, and I can change it later.

On the other hand, I am planning on seeking angel investment within 2-3 months, and I hear investors prefer a C-Corp. But setting up a C-Corp in Delaware seems like a big hassle right now, when I just want to make a terms of service and accept some payments to verify my business model. My advisor says he can connect me to a good silicon valley law firm that will work on deferred compensation, but I'm worried this process will be too slow for now. I just want to deal with this and focus on getting more leverage, then reincorporate when needed.

So anyway, is the process of converting an LLC to a C Corp so messy that I should take time now to "get it right," or can I get away with just moving forward on my own, without lawyers, and dealing with it later, when I have more leverage?

Thanks for any advice.

9 comments

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nolite
sorry for the aside... can you explain how having terms of service requires a corporate structure?
nathansobo
Well, in the example terms of service that I've read, they discuss a legal agreement between two parties, the user and a corporate entity operating the site. Otherwise the agreement is between what... the user and me personally? Seems not smart legally or very professional. But maybe I'm wrong about this. It was just an assumption and I am inexperienced in these matters. Plus I want to setup payments, which means I need to setup an account. Shouldn't that be in the name of a corporate entity and not me personally?
ckoglmeier
An LLC is a legal entity - that's the whole point. The owners (you) are only liable up to the investment made into the entity.

A few key differences: An LLC allows the owners to choose the setup for tax purposes (act like any other kind), commonly has pass through taxation and is only able to issue one type of stock, common. However, it provides all of the legal protections as that of a C Corp.

To my knowledge, investors prefer C Corps for two key reasons: 1) Preferred Stock 2) Company Structure (LLC's can setup however they wish, C-Corp is more restrictive and includes a board).

One option is having the LLC purchase stock in the C-Corp as a means of transferring assets later. Many investors have their investments setup as seperate LLCs (liability issues) and do their investing this way.

pinksoda
It sounds like you haven't even talked to investors yet. You don't need a corporation to create a TOS, nor do you need a corporation to accept payments.

Cross those bridges when you get there. I don't see this leverage you keep referring to. They restructure businesses all the time. Having the right incorporation doesn't make your startup/idea/business any better, so why don't you focus on improving those things?

nathansobo
I interpret your comments as coming from a concern that I'm putting the cart before the horse in worrying about such details too far in advance of a product. I assure you that I'm not a douchebag with an idea that's setting up a company around nothing. I have a minimal viable product and what I'm learning is that customers want to see that I'm charging for the service and that there's a TOS that protects their data. That's the only reason I'm worried about incorporating at the moment. I guarantee you I'd rather ignore it, but I don't have confidence that I can. Maybe you can help me gain that confidence.

In setting up a terms of service without a corporation, who do I structure the agreement with? In examples I've seen, it's with a corporate entity, like 37signals, LLC in the case of Basecamp. It seems strange to make it an agreement with me personally, and potentially legally unwise. As far as accepting payments, those can presumably go directly to me, but again doesn't it make more sense to vector them to an independent entity? But maybe my thinking is wrong about this. I'd love to hear your thoughts.

nolite
You should speak to a real accountant obviously.. but I've heard that its entirely possible to be take on personal liability even if you run an LLC. Again, I'm no expert so talk to an accountant, but I've heard something along the lines of LLC's being run by a single member offering no real liability protection. Many accountants seem to recommend S-Corps, but yeah, if you want to have investors you'll need a C-Corp.

As for separating your business operations from your personal ones, that seems like a responsible thing to do.. so definitely do that.. but speak to a real accountant first

damoncali
In at least some states (Delaware included, I believe) converting is basically a check box and very easy. Check with a lawyer.
staunch
Investments (like all deals) often dangle on the edge until the ink is dry. Anything relatively trivial thing you can do to increase the odds of it working out is probably worth it. If raising money is just a few months out then I'd definitely go for the Delaware C Corp.
brudgers
IANAL.

A C-corp makes more sense at a certain scale and when targeting specific types of investors, but an LLC can accept investment from new members. The terms would ordinarily be incorporated into an operating agreement.

LLC's can operate at a large scale...Chrysler is one.