Why your startup should be a Delaware C-Corp, not an LLC • Hacker News Board

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

#81

Post by pdshrader » Wed, Mar 15, 2017, 6:53 PM UTC

jawns wrote: post #75

pdshrader wrote: post #70

Earlier quoted context omitted.

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 wea…

True, but most people don't actually know the practical effects of having an established body of law. Mostly because it's difficult to compare Delaware with 49 other different sets of rules in a digestible format.

Here's one example of the difference between CA and DE: California, as a baseline, generally requires class votes on amendments to charters. Delaware, as a baseline, generally requires only a majority of all capital stock to vote in favor of an amendment to the charter. This means that in California, the holders of common stock (or the holders of a prior venture round stock) could potentially block a future round of financing, which most VCs would say is not a great result.

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

#82

Post by pdq » Wed, Mar 15, 2017, 6:54 PM UTC

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…

You are correct. Texas (as do most other states) penalizes foreign corporations as an incentive to file as a Texas corporation/LLC.

Yes on your second point as well -- you can delay this while developing the business. Although if you have revenue or Texas payroll (or outside investment), you definitely need to file as a foreign entity.

The reason behind the popularity of Delaware Corporations is the Chancery Court system, which is unique in the US: https://www.youtube.com/watch?v=0qIEvUYzwrc

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

#83

Post by pdshrader » Wed, Mar 15, 2017, 6:58 PM UTC

droithomme wrote: post #21

A Logical Fallacy: We did something we think might be right for us (but we don't really know yet), therefore everybody in the entire world should do exactly the same thing regardless of their circumstances, and divorced from whether or not this actually works for us or not.

Agreed. The argument Gust presents here for making a C-corp is pretty darn thin, if not verging on inaccurate.

I agree that a C-corp is the right way to go if you're planning on raising venture rounds, but the three reasons presented (can grant stock, can grant options, and required by investors) are misleading at best. LLCs can grant membership units/shares and profits interests, which can act functionally very similar to stock and options.

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

#84

Post by andrew_gust » Wed, Mar 15, 2017, 6:59 PM UTC

austenallred wrote: post #68

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.

It's actually pretty easy and the difference in cost between LLC and C-Corp isn't substantial (if you use Gust Launch it's all included in the $199-$239 monthly) but either way, since the double-taxation mostly doesn’t apply to high-growth businesses that reinvest capital instead of paying it out, there isn’t actually much difference in tax burden, and what there is is significantly outweighed by cost of converting to a C-Corp later.

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

#85

Post by fish2000 » Wed, Mar 15, 2017, 7:00 PM UTC

I haven’t got a ton of experience in this arena, but what I have done in the past is: 1) incorporate the larger venture as an LLC (“My Company, LLC”); 2) incorporate the specific project as a C-Corp (“My Company’s App, Inc.”) – my partners and I own the LLC, which controls the C-Corp, which holds the assets of the project.

Specifically, this makes it easier if we want to sell ”My Company’s App“ to a Facebook- or Google-class buyer entity. The LLC can also incorporate a bank, if ”My Company’s App“ needs to start conducting transactions that necessitate the use of (say) a Federal Reserve client (á la Venmo or Stripe).

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

#86

Post by andrew_gust » Wed, Mar 15, 2017, 7:00 PM UTC

tptacek wrote: post #72

pdshrader wrote: post #71

Earlier quoted context omitted.

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.

This is exactly the part of the process that the first iteration of Gust Launch solved. All the paperwork for incorporation and company formation are streamlined and pretty easy to fill out, and included in the monthly cost. So conversion is much, much more expensive.

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

#87

Post by pdshrader » Wed, Mar 15, 2017, 7:01 PM UTC

tptacek wrote: post #72

pdshrader wrote: post #71

Earlier quoted context omitted.

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.

Yup. Noting also that incorporation costs are generally a fixed ceiling, whereas the conversion costs are a likely minimum. ;)

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

#88

Post by uiri » Wed, Mar 15, 2017, 7:06 PM UTC

eastdakota wrote: post #25

LLCs pass losses and gains through to their "members" (the equivalent of a C Corp's shareholders). While this can be tax advantageous to closely held firms, it creates significant complexity for professional investors. As a result, professional investors typically insist companies they invest in be C Corporations. As for Delaware, there's the most legal precedent on corporate law in the state making its rules the mos…

An LLC can choose its tax status - that can be as a sole proprietorship (for single member LLCs; basically it all goes on your personal return), as a partnership/S corp or as a C Corp.

I agree that you should either do a domestic LLC or a Delaware C Corp depending on whether you want a lifestyle business or a high growth venture capital-backed startup.

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

#89

Post by msf5042 » Wed, Mar 15, 2017, 7:10 PM UTC

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…

If there's a chance you will want to be raising funds or giving out equity than it might be cheaper to form as a C-Corp, temporarily elect S-Corp status, and elect to remove that S-Corp status when need be.

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

#90

Post by vidarh » Wed, Mar 15, 2017, 7:21 PM UTC

Kinnard wrote: post #40

vidarh wrote: post #23

Earlier quoted context omitted.

It'll be interesting to see "solutions" like that run into the first clashes with a legal system that is not inclined to accept "the software won't let us do that" as a valid excuse for not complying.

I tend to think about it the other way. I think it'll be interesting to see a legal system's first clashes with "code doesn't do that".

Most legal systems have hundreds of years of experience with clashes with people saying "we can't do that". It's one of the oldest excuses around.

The solution tends to be to either assign whatever applicable fines or other punishments applies, or to put someone in jail for contempt until the come up with a solution.

If you have structured your company in a way that makes it impossible for you to comply with a courts decision, then that is your problem - it does not absolve you of the responsibility to comply with the courts decision.

There's simply nothing new there. Blaming technology will rank up there with "the dog ate my capitalization table" on the list of arguments the court will not care about.