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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

#121

Post by marme »

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…

the big reason has to do with taxes. Many states have state corp taxes, delaware does not. If you only register in texas it means that you must pay corp taxes for all profits made worldwide, if you register in delaware you only pay state corp taxes for the business done in those states. If you do 100% of your business in one state there is no reason to register out of state

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

#123

Post by no_wizard »

For those of you who aren't raising money or have cash flush from VCs: how do any of you, if you're in California, handle the LLC 800 dollar min tax? Do federal deductions against the business typically negate it?

I understand the reasons for not having a direct LLC in Cali (Delaware, Nevada and Wyoming are the gold standard I realize)

Just wanted to know in practice if you just bite the bullet on the stupid minimum tax or not

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

#124

Post by biztos »

Probably a stupid question, but if you're bootstrapping a startup into which you might (but also might not) take investment at some point, wouldn't it be better to do whatever has the lowest cost and administrative overhead, and then sign over all its rights/assets/etc. to a fresh Delaware C-Corp when/if you have investors ready?

So for example if you're in California you might do a California LLC until/unless you have a VC ready to back you. Or if you're in Germany you might do a UG (aka "mini-GmbH").

The point being to get yourself a legal structure and liability protection at the lowest possible cost in both money and distraction, and if it turns into something you want to sell some or all of to Silicon Valley you make a new company to own the old company's assets.

IA(obviously)NAL but it seems like you should keep things simple until you need them to be a certain way.

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

#126

Post by trevmckendrick »

GoRudy wrote: post #117

Gust spends no time talking about what happens when you try and sell a C Corp. If it's a stock sale great... if it's an asset sale, incredibly not great... you will have double taxation. This matters. $10M paid to the company for an asset, turns into $6.5M after 35% corp taxes (using general numbers) and then $6.5M than distributed to shareholders, assume 30%+ (20% + state taxes + AMT (for now)) so $6.5M is now $4.55…

Thank you for writing this. It's incredibly important and basically no one talks about it.

I can only reiterate what you've said: - Selling your company in an asset sale as a C-Corp increases your taxes 20-30% or more - Unless you're a BFD and have tons of inbound acquisition interest, the acquirer is going to dictate whether it's a stock sale or an asset sale, and they will almost always want an asset sale (less liability for them) - You should only be a C-Corp in the first place if you're a venture backed startup. Start with an LLC and just do a conversion to a C-Corp when you raise money; this maximizes your optionality.

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

#127

Post by saycheese »

tptacek wrote: post #115
saycheese wrote: post #91

Earlier quoted context omitted.

A past comment from your profile included "Andrew from Gust" within it on a submission about Gust. [1] Please update your HN profile to disclose any affiliations you have with Gust. [1] https://news.ycombinator.com/item?id=13196766

Even though I think they're always meant in good faith, comments like these are virtually never helpful on HN. If you have something interesting to say about someone's affiliation, say it; otherwise, it's probably best to leave it alone. It was very clear to me and I assume many other people that this user was associated with the article.

With more than a handful of upvotes and my past experience dealing with similar situations, it's neither obvious, nor unreasonable.

Beyond that, while it's clearly at your option, as far as I'm able to recall anytime you've had a submission related to you pop-up on HN you've disclosed your affiliation.

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

#128

Post by ci5er »

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…

To user piker's point, most corporate attorneys are licensed to practice where they are and in Delaware, which has become sort of a default, because of the clarity of their regs and case-law. The deal seems to be: "Let's do business under some rules that both of us understand".

This Central Texas' startup attorney's blog is worth flipping through - and this article speaks to your specific concern:

  - http://siliconhillslawyer.com/2013/04/16/should-i-form-my-austin-startup-in-texas-or-delaware/
Net-net: You only need to worry about it if you are raising outside money. And it isn't any particular "Texas is stupid" kind of thing. (Many states are much worse...)

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

#129

Post by wheelerwj »

I hate to be that guy, but no one should take legal or accounting advice from a blog post. There are a lot of good reasons for your company to be an LLC or C-corp and there are a lot of good reasons to incorporate outside of Delaware.

Nevada for example also has no corporate income tax. Montana, South Carolina, and New Mexico don't specifically regulate money transmitters.

Delaware is great for share holder rights, but if you don't have a lot of growth or external investors yet, incorporating in Delaware may be overkill as you can always do so later.

Mostly, startups should be focused on product, not things like incorporating until you need to. And by then, spend the lousy 2k on an attorney to advise you and do it properly.

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

#130

Post by mikekij »

GoRudy wrote: post #117

Gust spends no time talking about what happens when you try and sell a C Corp. If it's a stock sale great... if it's an asset sale, incredibly not great... you will have double taxation. This matters. $10M paid to the company for an asset, turns into $6.5M after 35% corp taxes (using general numbers) and then $6.5M than distributed to shareholders, assume 30%+ (20% + state taxes + AMT (for now)) so $6.5M is now $4.55…

One of our early investors insisted we transition to a C-Corp "for tax purposes". We were later acquired via an asset sale. The acquirer refused to do a stock deal. We ended up paying an effective 61% tax rate federal+state on the exit. I really wish we would have stayed an LLC.

However, all of Gust's points are valid if you successfully negotiate a stock sale.

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