A Logical Fallacy: We did something we think might be right for us (but we don't really know yet), therefore everybody in the entire world should do exactly the same thing regardless of their circumstances, and divorced from whether or not this actually works for us or not.
Why your startup should be a Delaware C-Corp, not an LLC
21–30 of 176 posts
Re: Why your startup should be a Delaware C-Corp, not an LLC
#22Most angel investors and VCs will also insist that your company be a Delaware C-Corporation for legal reasons I keep hearing this, but what are these reasons?
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 K1s for all of your investments is a huge amount of work.
Re: Why your startup should be a Delaware C-Corp, not an LLC
#23I wonder when we will be able to integrate blockchain based entities like Aragon into the startup economy: https://aragon.one/ We haven't seen things like the first acquisition, the first bankruptcy, mergers, etc . . . and don't even know if those things are exactly possible as we conceive of them today.
That sounds like a category error. Your individual and/or corporate actions happen in a legal jurisdiction - technology does not change that.
It'll be interesting to see "solutions" like that run into the first clashes with a legal system that is not inclined to accept "the software won't let us do that" as a valid excuse for not complying.
Re: Why your startup should be a Delaware C-Corp, not an LLC
#24Most angel investors and VCs will also insist that your company be a Delaware C-Corporation for legal reasons I keep hearing this, but what are these reasons?
> Most angel investors and VCs will also insist
If they do "insist" on this regardless of circumstances, it would not be ideal to partner with them since they clearly don't know what they are doing. And if you are partnering with someone, don't you want them to know what they are doing?
Re: Why your startup should be a Delaware C-Corp, not an LLC
#25LLCs pass losses and gains through to their "members" (the equivalent of a C Corp's shareholders). While this can be tax advantageous to closely held firms, it creates significant complexity for professional investors. As a result, professional investors typically insist companies they invest in be C Corporations.
As for Delaware, there's the most legal precedent on corporate law in the state making its rules the most predictable. Uncertainty increases risk and, therefore, decreases investors' interest.
There are lots of things you should be innovative on when starting a company, corporate structure is almost never one of them. If you're starting a business and think you may raise money from professional investors, incorporate as a C Corp in Delaware.
Re: Why your startup should be a Delaware C-Corp, not an LLC
#26Spoiler alert: Gust is not your lawyer, don't take legal advice from them.
Re: Why your startup should be a Delaware C-Corp, not an LLC
#27You 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's pretty quick to set up a C-Corp too—it's much, much more annoying to change the LLC into a C-Corp when you do want to fundraise.
This is not true. It's very easy to convert from LLC to C corp but not vice versa. As a general rule it's easy to go from flow-thru entities to tax paying entities but not vice versa. This asymmetry of irreversibility, combined with the fact that most startup exits are asset, not stock, sales, makes the thesis of your post incorrect.
Re: Why your startup should be a Delaware C-Corp, not an LLC
#28Anyone starting a business should consult an attorney and an accounting firm, discuss your business, discuss your short and long term goals (are you planning to run the business forever, with partners, or sell it as soon as possible?)
They will help you determine the best solution for incorporation.
There is no cookie-cutter answer to incorporation and anyone that pushes one is probably selling you something and most likely not an attorney or accountant.
Re: Why your startup should be a Delaware C-Corp, not an LLC
#29Most angel investors and VCs will also insist that your company be a Delaware C-Corporation for legal reasons I keep hearing this, but what are these reasons?
When I did it, I was told in short by legal that "at this point it is a red flag if you don't do it."
The original reasons may have been tax based or precedent based, but at this point it is also because that's the default that VC is used to
Re: Why your startup should be a Delaware C-Corp, not an LLC
#30Most angel investors and VCs will also insist that your company be a Delaware C-Corporation for legal reasons I keep hearing this, but what are these reasons?
The reason is that many of their LPs (e.g. pension funds) are non profits, and they can't have taxable income flow up to them or their Unrelated Business Taxable Income will threaten their nonprofit status. VCs are flow-thru entities so any income hitting them from _their_ investments would hit their LPs. Therefore they can only invest in blocking entities.