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LLC vs. S-Corp vs. C-Corp

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Re: LLC vs. S-Corp vs. C-Corp

#31

Post by tnicks »

molsongolden wrote: post #23

I am sure the author of this article intended to help others make wise tax/entity formation decisions but many of the facts mentioned are just incorrect (tax rates and some general tax concepts). C-corps are fairly uncommon nowadays and for good reason You are almost always going to pay more tax in the C-corp and you will face built in gains issues when you realize this and decide to elect to be an S-corp. The tone o…

This is not legal advice*

I agree with the sentiment of your edit but would like to expand.

The key factor in an early stage company structural organization should be external risk reduction in relation to the founders and seed investors (they are already taking plenty of risk) while providing maximum return and low compliance costs. An LLC provides for this. If "institutional" investors come along then a change to a C-corp is trivial and low cost (when discussing securities sales it is almost non-existent if you are already selling LLC unit securities). The motivation being that the VC/Institutional investors are subject to a different tax structure if they buy units as opposed to shares (due to pass-through). So re-organizing as a result of an offer is completely reasonable in my opinion, just be upfront in discussions. This allows the LLC seed investors to take maximum profit and minimum risk during the pre-VC stage.

If you wish to contribute more to the business while organized as an LLC you can simply increase distribution percentage and have investors (yourself included) buy more Units (this eventuality must be prepared for in the original organization by providing enough units). And yes there is an element of "sales" to this with the current investors but if they bought in once and you paid them they should buy in again.

Re: LLC vs. S-Corp vs. C-Corp

#32

Post by will_brown »

markkanof wrote: post #28
jforman wrote: post #16

Earlier quoted context omitted.

An LLC may be easy to set up, but maintaining the personal liability shield is non-trivial. I'd recommend getting advice from a lawyer no matter the route taken.

Please expand on this. It's quite a bold statement to make without giving at least basic details about what non-trivial issues you are referring to.

With liability protection you want two forms of protection. The Founder(s) needs to be personally protected from the company liabilities, and you want to company to remain protected from the liabilities of the Founder(s).

For example if you form a "single member" LLC, or a LLC with 1 owner, because LLCs are partnerships Court's will not protect the LLC from the single Owner's liabilities because there are no partners to justify protecting the business. So if the Owner has debts, the creditors can go after the the LLC as a asset to cover the debt.

So while anyone can set up an LLC easily on their own, as in this hypothetical it would have been worth the money to talk to an attorney before forming and have the lawyer advise to and another second owner and receive protection with the LLC or form a corporation instead of an LLC as a single owner.

Re: LLC vs. S-Corp vs. C-Corp

#33

Post by CamperBob2 »

Why does any of this matter? If you need a particular corporate structure for an equity investment or other purposes, you form a new corporation that buys the assets of the old business, and life goes on.

A C Corp is absolutely nuts for anyone starting out, unless you just want to pay your taxes twice.

Re: LLC vs. S-Corp vs. C-Corp

#34

Post by Fundlab »

CamperBob2 wrote: post #33

Why does any of this matter? If you need a particular corporate structure for an equity investment or other purposes, you form a new corporation that buys the assets of the old business, and life goes on. A C Corp is absolutely nuts for anyone starting out, unless you just want to pay your taxes twice.

Can you expand on this?

Re: LLC vs. S-Corp vs. C-Corp

#35

Post by Fundlab »

will_brown wrote: post #32
markkanof wrote: post #28

Earlier quoted context omitted.

Please expand on this. It's quite a bold statement to make without giving at least basic details about what non-trivial issues you are referring to.

With liability protection you want two forms of protection. The Founder(s) needs to be personally protected from the company liabilities, and you want to company to remain protected from the liabilities of the Founder(s). For example if you form a "single member" LLC, or a LLC with 1 owner, because LLCs are partnerships Court's will not protect the LLC from the single Owner's liabilities because there are no partners…

Wyoming offers a lucrative incorporation package, you dont even have to live there.

http://wyomingcompany.com/wyoming-corporations/

Re: LLC vs. S-Corp vs. C-Corp

#36

Post by joshuaheard »

supercanuck wrote: post #11

S Corps are referred to as "Professional Corporations". Their intended purpose was for Doctors, Lawyers, Consultants etc. and other people looking for liability protection for services they provide. I believe in some states they even restrict the number of shareholders. Take that for what it's worth.

A Professional Corporation is different from an S-Corporation. The S-Corporation is an IRS classification of a regular corporation, while Professional Corporations are a different type of corporation created at the state level. Professional Corporation owners are limited to the profession it is aimed at. So they must be, for example, all lawyers or all doctors. They are generally used for professions that require a state license.

Re: LLC vs. S-Corp vs. C-Corp

#37

Post by ipince »

molsongolden wrote: post #23

I am sure the author of this article intended to help others make wise tax/entity formation decisions but many of the facts mentioned are just incorrect (tax rates and some general tax concepts). C-corps are fairly uncommon nowadays and for good reason You are almost always going to pay more tax in the C-corp and you will face built in gains issues when you realize this and decide to elect to be an S-corp. The tone o…

Can you clarify this:

"But then if you end up not spending that money because you made a boatload of cash the next year and want to take it out:"

Why would you have to pay taxes again? Sure, you can pay taxes on the growth, but you wouldve paid taxes on the growth even if you had taken it out.

Clearly I'm missing something, so please clarify :-)

Re: LLC vs. S-Corp vs. C-Corp

#39

Post by cmccabe »

staunch wrote: post #19
dylanks2 wrote: post #4

Being in a higher tax bracket doesn't lead you to pay more tax on your initial income, only a higher rate on money above a certain threshold. That said, the article is right in that an S-Corp or LLC sound right and are rarely a good idea because you sometimes lose out on certain tax deductions because your personal income is too high. Remember though, a tax bracket is a sliding scale... see the margin tax rates table…

YES! It's so annoying how few people understand this. People are never "in a tax bracket" -- only money is! Your first $40k may be taxed at 10% and your next $20k may be taxed at 15% or whatever, but you are not "in a tax bracket". The idea of being "in" a tax bracket gave rise to the dumb idea that making more money can net you less after taxes, which is virtually never the case.

Sorry, but it may be dumb, but it's true. Making more money can lead to less take-home pay. One really good example is if you hit the AMT (alternative minimum tax.) "Your money" is not in the AMT-- you are. And it often means that a raise can end up costing you money. There are also similar situations where getting a job can mean losing out on welfare, leading to you actually having less money to take home.

Re: LLC vs. S-Corp vs. C-Corp

#40

Post by CamperBob2 »

Fundlab wrote: post #34
CamperBob2 wrote: post #33

Why does any of this matter? If you need a particular corporate structure for an equity investment or other purposes, you form a new corporation that buys the assets of the old business, and life goes on. A C Corp is absolutely nuts for anyone starting out, unless you just want to pay your taxes twice.

Can you expand on this?

Not really, it just seems pretty obvious to me. A lot of founders seem to get hung up on whether to use an LLC, an S corp, a C corp, or some other structure. In my experience the question can be answered pretty trivially: create an LLC unless there's a reason not to create an LLC, in which case you probably want a subchapter-S corporation.

The issue of where to incorporate seems to be more important for C corps where the taxes aren't reported directly on the owners' returns. IMHO it's a waste of time and energy to try to anticipate the exact corporate structure that a future VC round, IPO, etc. will require. Start out by considering only what makes sense from your own tax perspective, then re-elect/recreate the business later on if you need to, registering it in another state if necessary.

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