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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

#61

Post by chimeracoder »

CalChris wrote: post #56

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 t…

> 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.

There's never any hard-and-fast rule in the startup world, but pretty much any VC will want you to be a C-corp instead of an LLC.

(You're unlikely to get refused funding just because your company is an LLC, but they'll likely want you to restructure before the deal finalizes).

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

#62

Post by tedunangst »

kcdev wrote: post #34
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.

When it is time for fundraising, is it possible to just create a new C-Corp, then sell the assets of the LLC to the C-Corp? Are there major tax implications? Is it possible to sell the assets for a $1? Or would that be in violation of some tax rule?

If you buy something for less than it's worth, you have to book the difference as income. Not much difference between buying $1000 widget for $1 and buying it for $1000 and then getting paid $999.

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

#63

Post by tedunangst »

StClaire wrote: post #10

Fun thing about Delaware: they have an equity court run by the state that functions as a secret arbitration panel. But instead of ruling in line with the law, they rule in line with what's deemed "fair," hence the name "equity court." Unfortunately we don't know how they rule so we can't run statistics on it. But if anyone would like to leak a data set, feel free to leave me a message in this thread

Delaware Court of Chancery? For completeness, you should explain how other states deal with the issues that the CoC rules on.

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

#64

Post by andrew_gust »

loourr wrote: post #52

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…

The post addresses this, but double-taxation doesn't usually apply very much to early-stage high-growth startups—most high-growth startups spend their positive cashflows for growth and thus don’t have any positive net income to pay taxes on.

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

#65

Post by jasode »

kcdev wrote: post #34
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.

When it is time for fundraising, is it possible to just create a new C-Corp, then sell the assets of the LLC to the C-Corp? Are there major tax implications? Is it possible to sell the assets for a $1? Or would that be in violation of some tax rule?

As one example, the first Facebook business entity was a Florida LLC. Mark Zuckerberg then created a new Delaware based C-Corp that bought the IP from the LLC.

I believe the original trigger for converting to a C-Corp was the Peter Thiel investment.

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

#66

Post by theli0nheart »

tptacek wrote: post #5

You can divide equity and issue incentive equity compensation at an LLC easily --- for less money than it takes to properly incorporate a Delaware C Corporation. We have an LLC with multiple classes of stock and vesting, and it took just a 20 minute call with our lawyer to get there. Our last company, Matasano, was an LLC for its entire lifespan (we eventually filed taxes as an S-Corp, but never reincorporated). LLCs…

Many states require that you file as a foreign LLC if you've filed in any other state, which basically will double your paperwork. IMHO / IANAL, but it probably makes sense for most folks who don't care to raise money to just file as an LLC domestically within their own state.

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

#67

Post by ska »

Kinnard wrote: post #16
ska wrote: post #6

Earlier quoted context omitted.

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.

Interesting, but a pretty strong claim to leave implicit in your statement, to say the least.

As far as I can see there is today both a massive technological and social gap to what is needed to force a crisis that might result in such a world, but it's interesting to think about.

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

#68

Post by austenallred »

tptacek wrote: post #5

You can divide equity and issue incentive equity compensation at an LLC easily --- for less money than it takes to properly incorporate a Delaware C Corporation. We have an LLC with multiple classes of stock and vesting, and it took just a 20 minute call with our lawyer to get there. Our last company, Matasano, was an LLC for its entire lifespan (we eventually filed taxes as an S-Corp, but never reincorporated). LLCs…

100% agreed.

I have multiple LLCs, one of which I hope to grow into a potentially venture-back-able startup one day. If we get to that point we can create a C corp then. The amount of hassle and money you save now is well worth the headache of fixing things later.

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

#69

Post by droithomme »

mikeyouse wrote: post #35
droithomme wrote: post #24

Earlier quoted context omitted.

> Most angel investors and VCs will also insist If they do "insist" on this regardless of circumstances, it would not be ideal to partner with them since they clearly don't know what they are doing. And if you are partnering with someone, don't you want them to know what they are doing?

The list of VCs that insist on a C-Corp is essentially the list of VCs. So sure, you don't need to convert, but you won't ever be able to raise VC money without converting.

Your statement is a complete lie mikeyouse, but thank you for playing.

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

#70

Post by pdshrader »

ndarilek wrote: post #33

Here's something I'm curious about. First off, I understand that few of you are lawyers, and any of you who are aren't being paid by me so none of this constitutes legal advice. :) I'd certainly talk to a lawyer before acting on it in any case, I just can't wrap my head around how Delaware is such an advantage. I read that Delaware C corps/LLCs are the way to go because they're inexpensive. I'm in Texas. It looks lik…

Startup/Venture Capital lawyer here (but not your lawyer). The foreign qualification requirement is fairly universal - California has it, too. There are occasions when incorporating in a different state can be beneficial, but generally if you're raising VC $$, VCs are going to want to invest in a Delaware C-corp.

Delaware is NOT the cheapest, but it is extremely flexible (both legally speaking and administratively speaking - there are very few states where you can pay a premium and find someone to come in on a holiday/weekend to file your restated charter to close a big deal), and it has a very well-established body of law. That means everyone knows what to expect. Think of it like a really great WYSIWYG editor, whereas other states' laws can be like coding a site in a brand new alpha release programming language.

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