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LLC vs. S-Corp vs. C-Corp

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

#51

Post by DenisM »

will_brown wrote: post #29

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…

> 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

Is this actually true? I keep reading stuff like this on the Internet, but the corporate law textbook "corporations" by Alan Palmiter indicates otherwise. It would be nice if people qualified their opinion by referencing actual cases or studies.

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

#52

Post by jpdoctor »

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…

> Corporate Federal income tax on $100,000 if you and your partner had a C-corp instead and took 40k salaries then left $100k in the company.

> Roughly $22,250 (About 22%)

I think your shot-in-the-dark about getting "unexpected news from his accountant" is close to the mark, because the author didn't seem aware that the C-corp would have taxed the $100K at all. The comparison point was completely missing from the article.

The other missing point about C vs S/LLC: Later on, when the corp has grown like a weed and it's time to take money, there will be a double taxation under C that is very disadvantaged.

Honestly, this is a case where the HN commentary is better than the article it points to.

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

#53

Post by Nrsolis »

eli wrote: post #47
will_brown wrote: post #30

Earlier quoted context omitted.

>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. I think you are correct few start-ups and small businesses will ever incorporate and be taxed as a C-Corp. However, there are limitations to the S-Corps, such as a max of 100 shareholders and I think prohi…

My understanding is that a C-Corp also has much simpler paperwork around tax time.

NOPE.

C-corp taxes are subject to all sorts of rules. You can't do C-corp taxes on your own except in the most simple of circumstances. You definitely need a CPA (and a good one) if you're going this route.

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

#54

Post by Nrsolis »

jpdoctor wrote: post #52
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…

> Corporate Federal income tax on $100,000 if you and your partner had a C-corp instead and took 40k salaries then left $100k in the company. > Roughly $22,250 (About 22%) I think your shot-in-the-dark about getting "unexpected news from his accountant" is close to the mark, because the author didn't seem aware that the C-corp would have taxed the $100K at all. The comparison point was completely missing from the art…

This guy is focusing on taxes when the better question to answer would be: "What corporate structure makes sense for you given your goals?"

There are a whole range of issues to consider of which taxes are but a single one. All sorts of things can complicate this which is why you need to really do your homework before you set up a structure.

For one thing, the author doesn't understand "retained earnings" in a C-corp. You can't just let that cash pile up indefinitely. There are "retained earnings" taxes that can hit you pretty hard if you're not doing things right. You also will get hit with the dreaded double-taxation issue once you do decide to take the cash out. And he's totally neglecting the issue of STATE corporate taxation which adds another layer of complexity to think about.

You choose your structure based on who is putting in money, how involved they will be in the business, what is at risk, and who gets what if the company is successful. That's it.

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

#55

Post by Nrsolis »

ksherlock wrote: post #6

It's a little more complicated than that: > An LLC with either a single member or more than one member can elect to be classified as a corporation rather than be classified as a partnership or disregarded entity under the default rules discussed earlier. File Form 8832, Entity Classification Election, to elect classification as a C corporation. File Form 2553, Election by a Small Business Corporation, to elect classi…

Nobody does this. You give up the benefits of pass-thru taxation that you GAIN with an LLC. You're essentially volunteering to be taxed TWICE if you make this election.

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

#56

Post by ericabiz »

georgemcbay wrote: post #13
Afforess wrote: post #9

What isn't mentioned here is that an LLC is relatively straightforward to set up, an average Hacker News reader could set one up in their state with a few hundred dollars and no lawyer. S-Corps are more complicated (you will need a lawyer), and C-Corps are VERY complicated (you will want at least 2 lawyers). The amount of legal fees and time spent creating the different corporations varies immensely. It's not as simp…

"What isn't mentioned here is that an LLC is relatively straightforward to set up, an average Hacker News reader could set one up in their state with a few hundred dollars and no lawyer." This is true but it should also be noted that in some states you can get taxed a significant amount of money per year on your LLC. California, in particular, has an $800 minimum tax per year on LLCs, regardless of whether you've ear…

California's $800 minimum corporate tax also applies to S-corps and C-corps. Also, to correct a common misconception I often hear (not in your particular post, but in general when I talk about this), registering your corporation in another state does not exempt you from the minimum tax. If you, the corporation's officer(s), live in California, you must register with the state of CA as a foreign corporation (foreign in this instance meaning out-of-state), and pay the $800 minimum tax.

Do not try to get around this--California will hunt you down.

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

#57

Post by Nrsolis »

vonmoltke wrote: post #45
cmccabe wrote: post #39

Earlier quoted context omitted.

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.

Yes, the AMT is the one case where you could end up with less take-home. Its an exception to the normal functioning of the tax code, though, and it works by prohibiting most permissible deductions. Thus, while the statement about the AMT decreasing take-home with increased is factually correct, this does not happen through the bracket system. GP was clearly addressing the misconception that people move into tax brack…

UGH.

People in the USA forget that we have TWO tax systems.

One is the regular tax system that everyone knows and loves to hate.

The other is the closest thing we have to a "flat tax" and it's called AMT. It has different rules and different rates.

When you do taxes, you compute your tax liability using BOTH systems and you pay the HIGHER amount. That's how it works.

I pay AMT and it sucks.

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

#58

Post by swampthing »

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…

C-corps are fairly uncommon nowadays and for good reason

This is a bit misleading for people looking to start your typical startup (using PG's definition of 'startup'). All those startups you read about raising money - want to know how many of them are C-corps? Just about 100%.

One thing that many people don't realize is that for many startups, those pass-through tax benefits of LLCs and S-corps are largely illusory, since they're not going to be profitable at that stage anyways.

Starting off as an LLC means you're going to introduce delay when you start raising money (unless you're really on top of things and convert in advance of fundraising), which introduces deal risk.

Yes, there is double taxation on income from C-corps, but most startup founders aren't in it for the salary / dividends, they're in it for the eventual acquisition / IPO (or these days, private market sales). Gains for QSB stock held more than 5 years are now tax-free under Section 1202.

There's a whole bunch of reasons why companies end up as corporations - not just the QSB stuff. Main street small businesses are often fine with LLCs or S-corps. Startups (as defined by PG) should really talk with an experienced startup attorney before going the route of an LLC or S-corp.

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

#59

Post by berberous »

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…

I've heard leading lawyers at the Silicon Valley firms recommend that any start-up seriously seeking VC funding choose a Delaware C-Corp.

The main reason being that investors do not want to deal with the pass-through income associated with an LLC or S-Corp.

(Of course, this is not legal advice, and you should speak to your lawyer.)

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

#60

Post by swampthing »

Nrsolis wrote: post #53
eli wrote: post #47

Earlier quoted context omitted.

My understanding is that a C-Corp also has much simpler paperwork around tax time.

NOPE. C-corp taxes are subject to all sorts of rules. You can't do C-corp taxes on your own except in the most simple of circumstances. You definitely need a CPA (and a good one) if you're going this route.

It's not really hard / expensive to find a CPA that can do C-corp taxes, at least in Silicon Valley.
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