Inc. or LLC?

https://news.ycombinator.com/item?id=41308

by mcu • 19 years ago

15 26 19 years ago

news.ycombinator.com

What would you suggest for a startup?

rms3• 19 years ago

Startup implies rapid growth, which means you want to be a Delaware Class C Corporation so you can raise VC money.

An LLC is fine for a business where you expect to make your money from profits rather than a liquidity event and aren't trying to raise VC money.

tuukkah2• 19 years ago

According to this, it should be possible to convert an LLC into a Delaware corporation later: http://www.feld.com/blog/archives/2006/03/entity_conversa.ht...

epi0Bauqu4• 19 years ago

Yes, but what's the point? Not that much difference in cost or maintenance time. And it is just one more hurdle to deal at a time when you don't need hurdles, e.g. when you are trying to close a funding deal.

epi0Bauqu4• 19 years ago

An LLC shouldn't hamper you in an acquisition liquidity event. In fact, there are often tax benefits for the buyer vs a C corp. The reason not to do it is if you want outside investors. VCs just don't usually invest in LLCs as far as I can tell.

davidw3• 19 years ago

I went with an LLC, but I think it depends a lot on your situation. Mine is that I'm going it alone in many ways, and want to keep costs down, and don't foresee investments in the near future.

weeblyrocks5• 19 years ago

Why not a subchapter S if you wanted to keep costs down?

davidw3• 19 years ago

From what I read, non-US citizens/residents can't take part in S-corps, and since I am physically located in Europe, should I ever want to partner up with someone and include them in the company, perhaps it would be easier with the LLC. It also seemed like a slightly lower hassle way of doing things. I could be wrong, but in the end, after doing my reading, I just picked one and got on with it.

mcu2• 19 years ago

This will be a small to begin with, I just finished school and owe too much in student loans to quit my day job. An LLC is attractive for the low record keeping and tax paperwork requirements. One concern is that I see no legal framework for vesting built into LLCs, I'd rather not roll my own.

Has anyone looked into filing an operating agreement in Nevada instead of Delaware? Among other benefits, a cursory glance at the facts seemed to indicate that the tax burden would be lower in Nevada.

Am I missing something obvious?

rms3• 19 years ago

It's cheaper to have a corporation in Nevada. Delaware is popular because there is more corporate law precedent there.

zach3• 19 years ago

An LLC has shares just like any other corporation. You just keep giving shares to those who stay on and don't give them to those who don't. Stock options are another matter.

The primary point of incorporating in Delaware is for the outstanding legal and administrative structures they have for corporations. Not everyone is incorporated in Delaware -- Apple has always been a California corporation. But better to do it now rather than have to later.

In any state, the tax burden for a foreign corporation (one incorporated in another state) is going to be about the same as one incorporated in that state. That's because states have complete control over taxing revenue earned in their state, regardless of where entities are incorporated.

Nevada is business friendly, but since the state has no income tax, it also has a stigma of being quite popular with tax cheats. So it may increase the chance of an audit.

rms3• 19 years ago

In PA, an LLC can have shares but only if you write the legal framework yourself. By default, a PA LLC has membership interests, which are defined as a certain percentage of the company.

dk• 19 years ago

As per zach, the state where you're operating is going to impose income/franchise taxes regardless.

I've heard of strategies that involve multiple entities. So for instance you might form a Nevada entity that owns the IP and licenses it to the operating entity. The licensing/royalty fees serve to shift a fraction of your income out of state where it can't be taxed.

That's all I know. For us it'd be way too much hassle just to avoid (some of) the ~4% franchise tax.

weeblyrocks5• 19 years ago

The reason most attorneys advise Delaware is that the precedents are strongest there. Furthermore, it makes long-term legal costs lower because most corporate lawyers are familiar with Delaware's nuances.

All corporations are C by default. You have to file a special from with the IRS to become an S Corporation. S Corporations are flow-through entities which are not taxed at the corporate level. The reason VCs require you to be a C Corporation is two-fold:

1. VCs like to have unilateral rights and terms to give them downside protection such as liquidity preference and preferential stock classes such as Preferred Shares. S Corporations are simpler entities which only allow a maximum of 40 shareholders - as your company grows and you give stock grants or options, this won't work. LLCs only allow 75 shareholders.

2. VCs will claim that a C Corp structure gives you more flexibility. This is marginally true, but LLCs give you the same flexibility with slightly higher administrative cost but you can maintain the flow-through status which is advantageous.

The real reason is they want preferred shares and special rights. Stay an LLC or S Corporation if you don't need institutional investors. Angels are happy to invest in well structured LLCs or standard subchapter S Corporations.

drusenko• 19 years ago

who are you? :)

weeblyrocks5• 19 years ago

Someone.

ajmoir• 19 years ago

I just inc'd in CA, I looked at LLC but that's a partnership and I'm doing this alone.

I went for the quick and easy route. I'm looking to build a good product not a big corporation. The less time I spend having to futz with the lawyer/Accountants and Tax man the happier I'll be.

davidw3• 19 years ago

You can be the sole owner of an LLC.

lyndabra• 18 years ago

If you are an LLC in Tennessee and operate as a foreign entity in PA as a corporation - not an LLC. Would this be legal? Would you have to file Articles of Incorporation or Amend Authority to do Business?

Please answer. Your response will be greatly appreciated.

Thank you.

Lynda

Inc. or LLC?

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