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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

#51

Post by willholloway »

forgottenpass wrote: post #26

Spoiler alert: Gust is not your lawyer, don't take legal advice from them.

Why is this the default answer to any discussion on topics such as these?

I look at it as Vaudeville acts vs Hollywood films. Or local hack community college professor vs Youtube Stanford Machine Learning Course.

The legal and tax situation is written into the law. The VC outlook on this topic is common knowledge.

So why do we have to pay expensive consultants (attorneys, accountants) for what are in reality just FAQ's.

Incorporating an LLC is one of the easiest government interactions I have ever had. It is literally a one page form, the hardest part is picking the name of the company (definitely check the US trademark office database and get the .com)

It was the same for the Delaware C Corp I created. A one page document that needed to be faxed.

All the rest of the paperwork was very elegantly handled by Clerky.

I think there is a big risk in going for advice from an attorney and getting bad advice. I feel much more comfortable in broad research on a topic and crowd-vouched and vetted knowledge rather than trusting one sole practitioner.

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

#52

Post by loourr »

He forgets arguably the most important consideration - taxes.

C-corps have double taxation and LLCs do not. For every dollar you pay yourself from your cooperation you'll have to pay on the order of 15% more.

If you plan to never make money or just make money by raising money then a C-corps is for you. Other good argument is if you plan on going public. Otherwise strongly consider the tax implications before starting a C-Corp.

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

#53

Post by tptacek »

koolba wrote: post #47
tptacek wrote: post #13

Earlier quoted context omitted.

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

There may be more structure required but starting off from a C corp obviates the need to transfer control of assets (particularly intangible ones like copyrights to source code).

You're paying a substantial amount of money up front to hypothetically mitigate a hypothetical future expense that only occurs at the point where cash flow (at least on the order of "covering legal expenses") stops being an issue.

That doesn't sound like a good deal to me, but that's just, like, my opinion, man.

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

#54

Post by Digory »

A reminder: LLCs aren't one tax status.

You can have an LLC taxed as an S-Corp, an LLC taxed as a C-Corp, or an LLC taxed a pass through. Anyone who says an LLC is taxed in a particular way is way over simplifying to the point of confusion.

But, to over simplify on my own, Delaware is popular because it has a history of protecting shareholders over management. The movie Wall Street exists because in the 80s, companies tried to protect themselves from investors -- and Delaware stuck with shareholders firing management (not entirely, but significantly). In theory, investors may pay a bit less if you're in a state without that track record.

But, there are plenty of exchange-traded LLC securities, so it's not a bar or ban to fundraising.

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

#55

Post by louprado »

If I understand correctly, a California company that forms a Delaware C-Corp will not only have to pay California state taxes but also 7.8% taxes to Delaware.

Is my statement accurate ? 7.8% of net profits is such a huge expense I can't understand how any company justifies it.

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

#56

Post by CalChris »

Is it true that you may enter the funding cycle as an LLC but that as a practicality you won't exit funding as anything but a C, that angels and VCs will insist on this restructuring? I think the answer is yes but I don't know.

Can someone price the cost of converting a Delaware LLC to the C structure that VCs will expect? I think (again, I don't know) that we're talking about a couple of grand of post-money lawyer time.

Early stage startup founders have a lot on their plates. Getting this nuance right to save a few bucks will cost some upfront neurons and some time for something which is ultimately procedural. The OP suggests that we mentally work through this ahead of time and I see the point. But it's like priced equity vs SAFE. It requires a lot of upfront neuron work.

The LLC vs C tax issue seems to be a bit of a canard. You most likely won't have any profits to tax this early and you won't exit funding as an LLC.

Anyways, as the Zuckerberg Florida LLC example shows, you can get these things slightly wrong and still move forward. Getting something infinitely right will guarantee that you will never move forward.

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

#58

Post by koolba »

tptacek wrote: post #53
koolba wrote: post #47

Earlier quoted context omitted.

There may be more structure required but starting off from a C corp obviates the need to transfer control of assets (particularly intangible ones like copyrights to source code).

You're paying a substantial amount of money up front to hypothetically mitigate a hypothetical future expense that only occurs at the point where cash flow (at least on the order of "covering legal expenses") stops being an issue. That doesn't sound like a good deal to me, but that's just, like, my opinion, man.

Quantify substantial.

Last time incorporated a Delaware C corp it cost me a couple of stamps and filing fees. I don't remember exactly but it definitely wasn't an obscene number. The annual upkeep, including franchise tax and registered agents, is around $600.

If you're not going to have a nexus in another state (i.e. No physical location or storefront) then that's peanuts for having a corporate vehicle in the the state for corporate vehicles.

If the cost difference of a couple hundred bucks is enough to break your bank, I'd suggest finding a 9-5 job rather than incorporating.

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

#59

Post by tvladeck »

piker wrote: post #48
tvladeck wrote: post #30

Earlier quoted context omitted.

The reason is that many of their LPs (e.g. pension funds) are non profits, and they can't have taxable income flow up to them or their Unrelated Business Taxable Income will threaten their nonprofit status. VCs are flow-thru entities so any income hitting them from _their_ investments would hit their LPs. Therefore they can only invest in blocking entities.

I agree with this, but out of curiosity, presumably the funds have their own blockers/SPVs below that they could just route their investments through and allow other investors in the startup to receive the flow-through treatment (like we would in hedge/PE). My assumption was that the standardized governance structure of a Corp was also appealing to VCs who prefer it to the possibility of being screwed by an adverse a…

yes this is commonly done in PE but for whatever reason it's not done in VC. usually they say it's b/c of compensation via options but i don't actually believe there is a principled reason behind it.

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

#60

Post by louprado »

I formed a Delaware C-Corp when I had a different vision for my company.

But now I have no plans to raise capital, get co-founders, issue stock, etc. I just want to run the company as as a solo-founder cash cow.

I never issued a single share (even to myself), never assigned any IP, and the company has no tangible assets. I just ran expenses and payroll through the company. I suspect that would make closing the C-Corp easy. I'll then create a new CA LLC with completely separate books.

I realize HN isn't a free legal advice forum, but any comments regarding the challenges of closing a DE C-Corp would be appreciated.

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