Once I create a C-Corp can I change it later to a LLC, for selling assets later and paying less taxes, per example?
Why your startup should be a Delaware C-Corp, not an LLC
141–150 of 176 posts
Re: Why your startup should be a Delaware C-Corp, not an LLC
#142If 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.
No. That 8.7% tax is for taxable income derived from Delaware i.e. if you physically operate out of Delaware.
Re: Why your startup should be a Delaware C-Corp, not an LLC
#143You 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…
> it takes less than an hour to get a Delaware LLC on the Internet Setting LLC's up is easy (even setting up a C-Corp is considerably easy) but for me the problem is always to maintain it and file taxes and other stuff on time etc. Is there any startup/service that helps me solve that problem?
LegalZoom has a compliance calendar feature and it tries to warn you of (some?) impending deadlines.
It's best not to rely on a third party to do the work for you, though, since their errors could end up costing you a lot of money in fines.
Re: Why your startup should be a Delaware C-Corp, not an LLC
#144Earlier quoted context omitted.
No cash is needed to sell the assets or LLC to the C Corp. Most likely, you would sell the assets of the LLC to the C Corp in exchange for some number of shares (valued at the pre-money valuation of the company) and then issue additional shares equal to the VC money such that the total value of the new C Corp is the post-money valuation. Afterwards, the founders can distribute the shares and wind up the LLC. The alte…
I'm asking out of curiosity (e.g. I have no need to pay a lawyer or CPA to answer this): Would the founders have to potentially, or always, pay taxes on the conversion? Seems like the sale of the LLC or the assets could be recognizable gain.
It seems like it would qualify under the rules of an Other Nontaxable Exchange - Property Exchanged for Stock.[0] I think there are enough cases like this and the IRS rules are sufficiently clear that it will be possible to structure the VC investment in a way that eliminates any tax liability on the conversion.
[0] https://www.irs.gov/publications/p544/ch01.html#en_US_2016_p...
Re: Why your startup should be a Delaware C-Corp, not an LLC
#145I 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 Goog…
I don't see how this would make it easier? What advantage do you have?
Separation of concerns, fungibility, limited exposure, a lower bar on future legal entanglements … I could go on
Re: Why your startup should be a Delaware C-Corp, not an LLC
#146Earlier quoted context omitted.
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).
As an angel investor, I don't want to deal with that kind of hassle. If the company is losing money, it may want to carry forward the tax losses to offset future profits. If the company is making money, are you also going to distribute cash to your investors to offset the tax liability you just threw onto them? Will you get my K-1 to me well in advance of the April 15 filing deadline so I can plan my taxes, or will you piss me off by getting me a K-1 on Apr 14 and surprising me with a last minute tax liability? If any of your investors are non-US persons, now they have to file US income tax returns. These are the practical reasons why investors hate pass through entities.
Re: Why your startup should be a Delaware C-Corp, not an LLC
#147I 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, b…
You're confusing domicile with state of incorporation. E.g. A Delaware corp resident in Nevada pays no state income either. As others have said, if you plan to raise outside capital and have an exit, then you should be a Delaware C Corp. If you are planning a lifestyle business, then an LLC in your state of residence is fine.
Re: Why your startup should be a Delaware C-Corp, not an LLC
#148The one reason not mentioned here that may tilt it in favor of a C-Corp is if you anticipate that your company will likely be bought at some point (i.e. strong market interest). When you incorporate as a C-Corp (or convert to one), the clock for a QSBS exemption starts ticking (see: https://blog.wealthfront.com/qualified-small-business-stock-...) The QSBS exemption can make your first $10M free of federal tax, and so is a very nice benefit. There is no QSBS exemption for an LLC - you will have to convert to a C-Corp, and the clock starts ticking on conversion.
Re: Why your startup should be a Delaware C-Corp, not an LLC
#149Gust 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…
Dumb question, but why not sell the asset to a newly formed corporation without the liability issues, then sell that corporation?
Re: Why your startup should be a Delaware C-Corp, not an LLC
#150Gust 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…
Dumb question, but why not sell the asset to a newly formed corporation without the liability issues, then sell that corporation?
Conversion is treated as a taxable event. If you claim the IP is worth $0 but sell it two days later for $10M, you're going to have problems.