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Ask HN: When to Form an LLC?

3 points by rajacombinator ↗ HN
For a basic MVP level product that charges through Stripe and is going live in 2 weeks but has no customers yet. When is the right time to form an LLC? ie. What is the maximum amount of time one can postpone forming an LLC to minimize cost and time spent?

6 comments

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davismwfl
My personal general rule is once you take money for the product/service you should form the LLC, e.g. money should be deposited into a business account not your personal account.

I didn't always have that rule, I used to do a few deals first and put the money in a separate personal account with maybe a DBA under my name at most (many times without that) then if things were looking good I'd move forward -- this is a good way to test. But with the way the U.S. is and how litigious everyone is, the small price to gain a little extra buffer in the form of the LLC is not worth delaying. Part of this will depend on the value of the product/service and who it is serving. But basically, if you take money and something happens you could personally become liable for it if you took the money personally. If you are 25 and have no responsibilities or assets then that's probably not a big deal. If you are 40 have a family, kids, house, assets etc the math changes. So it is really up to you on risk aversion.

rajacombinator
Thanks, that makes sense. Here’s another related question: do you need a separate LLC for every MVP-level product or can they all be rolled into one? (Along with personal consulting work perhaps?)
davismwfl
So I have been advised in the past (by my attorney) to do it all out of one LLC (file d/b/a's if needed for marketing) and if you get one product that is a hit then you can isolate it from the others if you want later (but that really isn't required in most cases). But for sure, you don't need multiple LLC's just for multiple MVPs and consulting.

I maintain one LLC that I do occasional consulting out of and it also owns many of my business based investments, which includes stock and in a couple of cases units in other LLCs.

xq3000
I personally would make a different suggestion here: 1) set up a new corp as soon as possible to be able to track business expenses right away, issue stock, etc 2) use an S-CORP instead of an LLC. All those additional “processes” people usually mention are really just “good business,” not that difficult to keep up with, and ultimately will only add security especially if you will have cofounders / investors. 3) use ONE corp for all your MVPs, track per-product costs nicely for each of them (Xero does it well), and only maybe spin them off into separate companies if/when they succeed
davismwfl
I agree that the work people complain about for corporations is not a big deal, it is basic management and housekeeping that you need to do regardless of the business structure frankly.

One key consideration most people don't know or consider too is if you are a sole founder and in a state that disregards sole LLC membership then most people would consider the S corp to be superior. An S-corp in this case will provide greater protection to the founder's and corporations assets in case of litigation to either the founder or the company. Multi-member LLC's don't have this issue.

That said, LLC's are still easier for most people to manage, deal with taxes and avoid common pitfalls. Most attorney's I have talked to and seen do talks will push people more towards an LLC because they know people will screw up the corporation or do something that adds preventable risk if they don't have experience or professional management/guidance. Obviously this is more geared towards the majority of new businesses that aren't seeking millions of dollars in VC/Angel deals. Once you take outside money the rules and expectations are different.

Speaking of investment though, people many times point out Corp vs LLC under the guise of fundraising, saying you can't take an investment if you are an LLC. If you want to take VC dollars it is true that it is nearly mandatory to be a C-Corp and you need professional legal advice to do this properly. Conversion from an LLC to a Corp is possible, but not always good -- however there are things you can do in the operating agreement and articles for an LLC to make a conversion event nearly tax neutral. But it is false that you cannot take an investment into an LLC and it is false people won't invest in an LLC. Many high net worth people will individually invest in LLC's, just not a structured VC fund where the tax implications and investment thesis may prevent such an investment.

rajacombinator
Thanks very helpful. And to be clear, you’re suggesting forming an LLC then converting it to an S Corp through the necessary filings, right? (Clarifying as someone who hasn’t formed these before.) And the S Corp benefit seems to be mostly for tax purposes?