This is not legal advice.The article focuses on a very small tax issue that should not be determinative of business structure. The way a Start-up should decide to form a business generally should be as follows:
1. State - generally always choose the State the Founder is physically located. If you choose Delaware or another State you are not physically located, you must "qualify" your business to do business in every State you have a physical presence - failure to qualify may negate any protections offered by the business structure.
2. Structure -(Corp (S or C) vs LLC) This is determined on a two part analysis: First, I start with liability, CPAs typically only look at the tax issue, you want to ensure the Founder(s) will not be liable for business debts and the business can not be liable for Founder's personal debts. Example, I would always advise against a "single member" LLC because an LLC is considered a Partnership, thus Courts will not enforce Partnership protection where there are no Partners (ie, single member) and the LLC can be liable for Founder's personal debts - on the other hand a CPA will usually recommend single member LLCs because they are taxed like a sole proprietorship(make filing taxes really easy). Second, should be the tax issue, if multiple Founders I suggest LLC, especially when there are foreign Founders, if it is a single Founder then I suggest Corp. and S status if qualified.
3. Cost- This should never be determinative but taken into consideration. The cost of forming/qualifying Corp and LLC can vary greatly among the States. Additionally, compliance (annual reports, state taxes) among the States can vary as greatly as well as the cost of compliance and the penalties for failure to timely file can be very costly.
I know the word in SV is that Start-ups must be C-Corps incorporated in Delaware in order to receive funding. My thought is that if a Start-up is already incorporated/organized and has not received funding the Founders can easily: 1. "Domesticate" their business entity to Delaware, if an LLC perform a Conversion to a C-Corp., or 2. Dissolve and have the investors attorney's draft the new Delaware Articles of Incorporation.
As to the tax issue discussed I did not notice the article discuss that an LLC can be taxed as a C-Corp and if qualified elect S status. Also, playing the game of minimizing salary and maximizing distributions, while obviously beneficial because an owner only pays payroll and FICA on salary not on distribution, becomes a dangerous game that may result in the IRS knocking on the door. However, to the best of my knowledge the IRS has only ever gone after S-Corporations in such situations and have not set a precedent of going after LLCs.