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Why your startup should be a Delaware C-Corp, not an LLC

launch.gust.com

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Re: Why your startup should be a Delaware C-Corp, not an LLC

#11

Post by morisy »

There's legitimate reasons for wanting a C-Corp over an LLC, but we were an LLC for 7 years and almost nothing the author mentions was an issue:

a) Legal liability? "Limited Liability" is what the LL in LLC stands for. b) Dividing ownership? If you keep things simple, like a 50-50 split, not a problem at all. c) IP ownership? What?

Yes, if you're raising money you probably need a C-Corp, but if you keep things relatively simple, the transition doesn't need to be expensive or time-consuming.

Re: Why your startup should be a Delaware C-Corp, not an LLC

#12

Post by andrew_gust »

tptacek wrote: post #9
andrew_gust wrote: post #8

Earlier quoted context omitted.

It's pretty quick to set up a C-Corp too—it's much, much more annoying to change the LLC into a C-Corp when you do want to fundraise.

I've never done that, but that's not the advice I've gotten from lawyers. In particular, what I've been told is that C-Corp or LLC, there's going to be annoying conversion work at your first VC round.

Hmm, I'm not sure that's accurate. What would you be converting to if your company was already a C-Corp?

Re: Why your startup should be a Delaware C-Corp, not an LLC

#13

Post by tptacek »

andrew_gust wrote: post #12
tptacek wrote: post #9

Earlier quoted context omitted.

I've never done that, but that's not the advice I've gotten from lawyers. In particular, what I've been told is that C-Corp or LLC, there's going to be annoying conversion work at your first VC round.

Hmm, I'm not sure that's accurate. What would you be converting to if your company was already a C-Corp?

A C-Corp with the structure your venture capital firms expect.

Re: Why your startup should be a Delaware C-Corp, not an LLC

#15

Post by transitorykris »

morisy wrote: post #11

There's legitimate reasons for wanting a C-Corp over an LLC, but we were an LLC for 7 years and almost nothing the author mentions was an issue: a) Legal liability? "Limited Liability" is what the LL in LLC stands for. b) Dividing ownership? If you keep things simple, like a 50-50 split, not a problem at all. c) IP ownership? What? Yes, if you're raising money you probably need a C-Corp, but if you keep things relati…

The page never says a. or c. There is even a venn diagram down near the bottom showing they both have these qualities. It's arguing for incorporation, and then specifically as a c-crop.

Re: Why your startup should be a Delaware C-Corp, not an LLC

#16

Post by Kinnard »

ska wrote: post #6
Kinnard wrote: post #2

I wonder when we will be able to integrate blockchain based entities like Aragon into the startup economy: https://aragon.one/ We haven't seen things like the first acquisition, the first bankruptcy, mergers, etc . . . and don't even know if those things are exactly possible as we conceive of them today.

That sounds like a category error. Your individual and/or corporate actions happen in a legal jurisdiction - technology does not change that.

I think we're moving into a post-Westphalian world.

Re: Why your startup should be a Delaware C-Corp, not an LLC

#17

Post by andrew_gust »

tptacek wrote: post #13
andrew_gust wrote: post #12

Earlier quoted context omitted.

Hmm, I'm not sure that's accurate. What would you be converting to if your company was already a C-Corp?

A C-Corp with the structure your venture capital firms expect.

Part of the premise of Gust Launch is that it's far simpler to start this way, as a Delaware C-Corp with expected structure, than it is to convert later. The conversions range from easy to extremely painful but they're almost all avoidable.

Re: Why your startup should be a Delaware C-Corp, not an LLC

#18

Post by zekevermillion »

edoceo wrote: post #4
n0us wrote: post #3

Why no mention of S-Corp?

S-Corp is a pass-thru, so not acceptable to take outside money. The investor wants a C-corp. But home State or Deleware is debatable. I chose home State vs Delaware for tax reasons

LLC's are also passthrough by default, though you can elect another tax treatment easily enough. The problem with s-corps is that a valid s-election requires that all stockholders are humans. The presence of a business entity stockholder would void your s-corp status. Keep in mind that an s-corp is not a different kind of entity, it is just a corporation that has a valid election for passthrough taxation under subchapter s and equivalent state income tax provisions.

Re: Why your startup should be a Delaware C-Corp, not an LLC

#19

Post by elastic_church »

AND THE COUNTERPOINTS:

1. An LLC is easy and you can form a C-Corp whenever it is needed. If your investors are equity/debt firms, they can form the C-Corp for you at that time.

> but most startups usually stick with Delaware and file a foreign qualification form to operate in their own home state.

2. There are at least 55 states and territories in the United States which ALL HAVE THEIR OWN SEPARATE incorporation laws. Their legislature hasn't been asleep for the last 30 years, there is real competition in fees, regulations, anonymity, taxes and incorporation structures in many jurisdictions outside of Delaware.

If their courts encountered an unforeseen problem, they can all lean on Delaware's entire body of case law. So the benefits of Delaware's court of chancery are overstated, and the circumstances where you want that or its arbitration are slim.

3. Delaware's oh-so-progressive corporate laws also include parallel securities transparency laws that can introduce compliance burdens above and beyond what the Federal Government stipulates.

Conclusion: You don't need a C-Corp and you don't need to incorporate in Delaware. Being spoonfed the perks of Delaware is easy and barely anybody is publicly talking about what other states offer, and you will have to do your own research.

KPMG and Deloitte and PWC produce annual documents on incorporation perks in jurisdictions all around the globe. Including individual United States.

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