Hacker News Board Hacker News, browsed like a classic message board
Live data from Hacker News

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

launch.gust.com

Post reply on HN
Print view View original

71–80 of 176 posts

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

#71

Post by pdshrader »

tvladeck wrote: post #27
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.

This is not true. It's very easy to convert from LLC to C corp but not vice versa. As a general rule it's easy to go from flow-thru entities to tax paying entities but not vice versa. This asymmetry of irreversibility, combined with the fact that most startup exits are asset, not stock, sales, makes the thesis of your post incorrect.

Sure, as a general rule, but conversions from LLCs to C corps can get very complicated as well in short order, especially when there have been different types of equity issued to founders/employees (e.g. profits interests, convertible notes, etc.). If the cap table is sufficiently large, it can cause ballooning legal costs pretty quickly. Not outrageously so, but companies can expect at least a few thousand to get added to the bill.

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

#72

Post by tptacek »

pdshrader wrote: post #71
tvladeck wrote: post #27

Earlier quoted context omitted.

This is not true. It's very easy to convert from LLC to C corp but not vice versa. As a general rule it's easy to go from flow-thru entities to tax paying entities but not vice versa. This asymmetry of irreversibility, combined with the fact that most startup exits are asset, not stock, sales, makes the thesis of your post incorrect.

Sure, as a general rule, but conversions from LLCs to C corps can get very complicated as well in short order, especially when there have been different types of equity issued to founders/employees (e.g. profits interests, convertible notes, etc.). If the cap table is sufficiently large, it can cause ballooning legal costs pretty quickly. Not outrageously so, but companies can expect at least a few thousand to get ad…

... which is roughly how much money it'll cost to have a good lawyer carefully set up a C-Corp for you.

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

#73

Post by pdshrader »

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…

Startup/Venture Capital lawyer here (but not your lawyer). Agreed with chimeracoder below. As for cost, a few grand is a good minimum estimate, but it really depends on the complexity. If you've been around as an LLC for a while, you may have different types of equity that has been issued (e.g. profits interests), which will complicate the conversion process a bit. Your lawyer will also have to review the LLC's operating agreement to make sure there aren't any funky protective provisions or oddities that will complicate the conversion. Unlike most Delaware C-corp charters in the startup world, LLC operating agreements are extraordinarily flexible and variable documents, so it's a custom review almost every time we have to go through one of these conversions.

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

#74

Post by Kinnard »

ska wrote: post #67
Kinnard wrote: post #16

Earlier quoted context omitted.

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.

I wasn't trying to argue or prove that we're entering a post-Westphalian world. Just stating my belief that that is the case . . . I do have a day job . . .

Anyway, I bet Trump could do it!

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

#75

Post by jawns »

pdshrader wrote: post #70
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 sp…

> it has a very well-established body of law. That means everyone knows what to expect

Delawarean here! Having spent some time as a writer/reporter learning about the Delaware incorporation process, I've found that this is one of the biggest reasons why companies/investors continue to prefer Delaware.

Wyoming and Nevada are also known as business-friendly states in which to incorporate, but no other state has the wealth of case law that Delaware has.

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

#76

Post by pdshrader »

louprado wrote: post #60

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…

Startup/Venture Capital lawyer here (but not your lawyer). Winding up a corporation can take a little time, but it's generally not terribly complex. It's mostly filing a few forms with the state. However, there are more considerations that you'll want to make as you decide what to do - one question being, "who is liable for the acts of your company before the CA LLC existed?" Entities, when properly used, can shield you from personal liability. But if the entity is no longer in existence, then you may end up being personally liable for any acts (without the proper planning).

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

#77

Post by jawns »

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

You're talking about Chancery Court: http://courts.delaware.gov/Chancery/

I'm not sure what you mean by secret. Here are some of its recent opinions: http://courts.delaware.gov/opinions/index.aspx?ag=court%20of...

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

#78

Post by pdshrader »

pdshrader wrote: post #70
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 sp…

* note also that there's the oft-quoted "60% of Fortune 500 companies are Delaware C-corps," but most people forget about the contrapositive - that 40% of the Fortune 500 are NOT Delaware C-corps. It's the most common way to go, but not the only way to go.

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

#79

Post by epc »

rsweeney21 wrote: post #22
rajivtiru wrote: post #14

Most angel investors and VCs will also insist that your company be a Delaware C-Corporation for legal reasons I keep hearing this, but what are these reasons?

If you invest in an LLC then you will be purchasing membership units. If you have membership units in an LLC, then you have to file a tax form every year (K1) that reports your portion of the earnings or losses from the LLC. The investor will have to pay the taxes on his portion of any profit generated by the LLC, even if the LLC didn't distribute any the profit. Investors typically have dozens of investments. Filing…

The LLC issues the K-1 to the investors, you just attach it like the other 1099ish forms you receive from other sources of income (e.g. 1099-DIV).

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

#80

Post by nostrademons »

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.

Why not use Clerky? It's about a grand all-in, and since YCombinator uses them for all their incorporations, it's what all your investors are likely to expect.
Post reply on HN