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LLC vs. S-Corp vs. C-Corp

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

#61

Post by hkhanna »

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

This is not true. A single-member LLC gets the benefit of the personal liability shield.

However, as with any limited liability form, you can get the liability shield pierced if you don't properly organize and operate the LLC.

Because a single-member LLC has only one member, it might more likely to get the liability shield pierced since there isn't more than one party watching the documents and "formalities." (I put formalities in quotes because LLCs have very few formalities).

Source: Advising Small Business by Steven Alberty, Section 7:17.

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

#62

Post by tptacek »

swampthing wrote: post #58
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,…

You say starting off as an LLC means delay at fundraising. Unless you're advocating running entirely unincorporated, I think this is backwards: it is harder to convert your C corp to the form the investors will want than it is to convert an LLC. This was my understanding before last week, when YC's finance person confirmed it (at least as far as YC is concerned) on HN.

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

#63

Post by tptacek »

berberous wrote: post #59
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.)

You will not stay LLC or S after taking a round of funding. But you won't keep your C corp either, because there are lots of details you will get wrong in forming it. It is very straightforward to convert a sane LLC to the C corp that investors want. It is not as straightforward to convert your C corp to theirs.

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

#64

Post by swampthing »

tptacek wrote: post #62
swampthing wrote: post #58

Earlier quoted context omitted.

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,…

You say starting off as an LLC means delay at fundraising. Unless you're advocating running entirely unincorporated, I think this is backwards: it is harder to convert your C corp to the form the investors will want than it is to convert an LLC. This was my understanding before last week, when YC's finance person confirmed it (at least as far as YC is concerned) on HN.

Thanks for pointing that out - I should have been more careful with my words. What I meant to say is that most startups will be better off starting as a C-corp, provided that they use market-standard paperwork (i.e. the forms that the major Silicon Valley law firms use, which many of them provide for free) and don't mess anything up (which is consistent with what Kirsty was saying). Of course, I suppose the "not messing anything up" part is harder done than said (which is why YC companies are lucky to have Kirsty) :)

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

#65

Post by eli »

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.

I didn't mean so simple you could do yourself; I meant simple compared to S-Corp.

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

#66

Post by raldi »

swampthing wrote: post #58
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,…

YC will only invest in C-corps (though they'll help you convert if you're not one already).

Source: http://news.ycombinator.com/item?id=5193914

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

#67

Post by driverdan »

jforman wrote: post #49
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.

IANAL, but some basic details: There needs to be a strict separation between the corporation and the people behind the corporation. As part of this, the LLC's finances need to be kept rigorously firewalled from personal finances — never pay a corporate bill from your own pocket, for example, or vice-versa. You also need to follow the formalities of a corporation by keeping formal records (minutes, shareholder acts, e…

> There needs to be a strict separation between the corporation and the people behind the corporation. As part of this, the LLC's finances need to be kept rigorously firewalled from personal finances — never pay a corporate bill from your own pocket, for example, or vice-versa.

This is true about all formal business structures. They should always be separate from your personal finances.

> You also need to follow the formalities of a corporation by keeping formal records (minutes, shareholder acts, etc.).

Not true. LLCs do not require the record keeping that corps require. The only formal records you need to keep are contracts / member & manager agreements.

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

#68

Post by [deleted] »

swampthing wrote: post #58
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,…

[deleted]

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

#69

Post by gamblor956 »

swampthing wrote: post #58
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,…

90% of my clients forming new businesses in the US last year chose the LLC form for legal purposes (only 1 client formed a new C-Corporation, which they did solely for legal requirements). They split 50/50 between pass-through and corporate treatment for tax purposes.

LLCs are relatively easy to convert to a C-Corporation, as are S-Corporations (which can automatically convert to C-Corporations). C-Corporations are generally very difficult and very expensive to convert to other forms.

So, C-Corporation status is great if you know that you will be getting VC funding. It's not so great if you only think you want VC funding, and it's a relative nightmare if you are trying to bootstrap.

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

#70

Post by [deleted] »

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.

[deleted]
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