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

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

#151

Post by dawnerd »

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…

I spent about well less than an hour getting an LLC registered in Oregon. All online too. Pretty impressed with the state for how smooth the process was.

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

#152

Post by wheelerwj »

JumpCrisscross wrote: post #135
wheelerwj wrote: post #129

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, b…

> incorporating in Delaware may be overkill as you can always do so later This is not that simple. As a rule, I apply a discount (for legal cost and risk on all sides) to any American company raising funds out of a non-Delaware entity.

i understand its not that simple, thats why im advocating getting legal advice from places other than startup blog posts.

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

#153

Post by wheelerwj »

chrismaeda wrote: post #147
wheelerwj wrote: post #129

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, 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.

im not confusing anything. Deleware C corp is beneficial for a lot of reasons. so is an LLC. Many startups might have both.

Corporate structures are significantly more complex than:

> if you plan to raise outside capital and have an exit, then you should be a Delaware C Corp.

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

#154

Post by tnicks »

There are three points of his, with which I have personal experience, where I believe the article is incorrect.

1. Division of ownership in an LLC can be made very similar to a C-Corp. In all rights and restrictions. In an LLC it is typically called a Unit instead of a Share. You can sell a PPM (Private Placement Memorandum) for Units, at some par value, to raise money. You can dilute Units. Units can have voting rights or not. His statement on division is clearly incorrect from my own company where we had many initial investors. Some were institutional, some were individual, some were via investment vehicles.

2. He states LLCs don't have Options. This is also not entirely true. The similar vehicle in an LLC is called a Warrant. Warrants can have the same rights and restrictions as Options. Warrants are used to incentivize employees with ownership rather than cash. Again, in our company we used Warrants to attract talent and compensate early employees to great effect.

3. Protection is another point he brings up. Yes the Corp (C and S) is battle tested in the courts. Yes LLCs have not been tested to quite that extent. However, to flatly state that a C Corp will protect you is a little overselling what the reality is. The Corporate Veil is not impermeable. As a matter of fact, it is most often pierced (outside of blatant misconduct) by attacking under or low initially capitalized companies and closely held businesses. Companies like startups who start small and become successful quickly.

I see this particular article as not having researched LLCs, their use case, and the benefits they possess in some cases over Corporations. I understand no SV VCs will talk to you unless you have a C-Corp. I get it many Lawyers in the startup ecosystem want you to create a C-Corp. But this is truly a small percentage of businesses and even a small percentage of startup businesses.

Why blanket write off any particular solution (or all others for that matter) without first checking to see if it can meet your specific needs?

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

#155

Post by dang »

droithomme wrote: post #69
mikeyouse wrote: post #35

Earlier quoted context omitted.

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.

We ban accounts that post uncivil, unsubstantive comments like this, so please don't do that.

If you have a substantive point to make, make it thoughtfully; otherwise please don't post until you do.

https://news.ycombinator.com/newsguidelines.html

https://news.ycombinator.com/newswelcome.html

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

#156

Post by toast0 »

pdshrader wrote: post #81
jawns wrote: post #75

Earlier quoted context omitted.

> 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 al…

This gets murkier though because California law declares corporations to be 'quasi-California corporations' if they meet certain requirements such as having principle offices in the state, and then declares that some California corporate law rules apply. Case law isn't clear, so often class votes are held even if not required.

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

#157

Post by pdshrader »

toast0 wrote: post #156
pdshrader wrote: post #81

Earlier quoted context omitted.

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 al…

This gets murkier though because California law declares corporations to be 'quasi-California corporations' if they meet certain requirements such as having principle offices in the state, and then declares that some California corporate law rules apply. Case law isn't clear, so often class votes are held even if not required.

Ehh, since VantagePoint (DE Supreme Court affirming Chancery Court, 2005) and Lidow (CA appellate court in dicta, 2012) there hasn't been anything saying that Section 2115 should apply that I've come across. It's not perfectly settled, but it's not unreasonable to rely upon.

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

#158

Post by andromeda__ »

tristanz wrote: post #150
ChefDenominator wrote: post #149

Earlier quoted context omitted.

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.

Why don't US companies just employ a 'double Irish' on all their IP?

Edit: I mean from inception/company formation. Wouldn't that save you all the aforementioned headaches? Especially when the time comes for an exit to happen.

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

#160

Post by ChefDenominator »

tristanz wrote: post #150
ChefDenominator wrote: post #149

Earlier quoted context omitted.

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.

So, if I own a corporation that buys an asset for $500,000, then I turn around and sell the corporation for $10,000,000, I'm in some kind of hot water?
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