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

https://news.ycombinator.com/item?id=71021

by mhidalgo • 19 years ago

13 6 19 years ago

news.ycombinator.com

rms• 19 years 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.

biztaxtalk2• 19 years 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• 19 years 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• 19 years 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.

biztaxtalk2• 19 years 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 for more on taxation of various entity types.

ajkates• 19 years 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.

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

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