Should we create an LLC or a C-Corp or S-Corp?

Giuseppe Turitto Development Manager at ServiceChannel

September 12th, 2014

My partners and I we have been working for the last 8 months under a gentlemen's agreement and since we had no customers we didn't considered to create a legal entity until now. For most of the expenses I have been using my own Sole-Proprietorship entity. Now we are bringing a fourth partner, and we are closer to look for clients, we decided is time to grow up and be a legal entity.
Now question is what is recomended for a technology company that is expected provide service to medium to large corporations (we are not thinking right now into any IPO or anything like that but why not). We have read about LLC, C-Corp, S-Corp; and by now we have is just a headache.
We are located in New York state and we are not sure if is ideal create the legal entity in Delaware or Nevada or stay in New York.

Scott Milburn Entrepreneurial Senior Executive and Attorney

September 12th, 2014

Speaking as both an entrepreneur and an attorney, I strongly second Chris Murphy's recommendation that you consult with an attorney about this, not just look for answers here. It sounds like a c corp may be the way to go, but if you were in WA I would recommend you start with an LLC because that is easier to form and manage, and WA has made it very easy to convert an LLC to a c corp when the time is right.

As far as NY, DE, and NV, I have yet to see a good reason to go with anything other than your home state. The real reason people rely on for using DE is that everyone goes with DE, so you should too, but from a legal standpoint it really does not matter, and having a DE or NV corporation requires some additional administrative effort.

Chris Murphy Director of Corporate and Legal Affairs at E2open

September 12th, 2014

If you have reasonable expectations of taking external investment in the future, go with a Delaware C corp. if not, just go with a NY or Del LLC. A n S corp is a tax designation and NOT a formation structure. You can be an S corp and a C corp, just to make it confusing

By the way, because of all the work already done, I REALLY encourage you to use an attorney to get this all handled correctly. That situation is ideal for later lawsuits if not papered correctly. Good luck!

William Wallace Mead High-energy, high-integrity entrepreneur seeking next opportunity !

September 12th, 2014

If you think your business will ever take in funds from venture capital or other institutional investors you will be better off with a corporation from the start. Otherwise, you will have to convert from an LLC to a corporation as Scott mentioned. Many venture funds are structured as pass-through tax entities themselves and may have off-shore investors as limited partners.

If you anticipate that your business may end up being sold in a stock for stock transaction, you should either structure the business as a corporation so that you can easily take advantage of tax-free reorg rules, or you should convert your LLC into a corporation before you consider selling - before you even have a term sheet or initiate any conversations.

On the other hand, if you think that your exit will involve an asset sale and you do not anticipate raising venture capital, you almost certainly should organize your entity as an LLC. No matter how much more complicated an LLC may be than a corporation, it will be worth it if you save 30% or more of the proceeds of an asset sale. Unlike a corporation, there is no double taxation of asset sales for an LLC.

Here in in Massachusetts, if an S-Corp.'s annual receipts exceed six million dollars, the entity is liable for substantial state income taxes. An LLC is not liable for any state excise tax in Massachusetts.

Erik Moon Co-founder at Hinted / Co-founder at MakerPair.com / Stanford GSB Sloan Fellow

September 12th, 2014

Agree with the general sentiment: If you're going for external investors, they will all want you to be a Delaware C-corp by the time you cash their check. So if you have any other org structure prior to taking institutional (or even Angel investor) money, you will end up going through the trouble of converting to a C-corp at that time.

One thing that we heard a lot from VCs - investors generally start with a blank slate and are actively looking for reasons NOT to invest in you. Everything that is weird about a startup gives them that additional reason - an org structure that is NOT a Delaware C-corp is simply a red flag that they are working with entrepreneurs that didn't do their homework before incorporating...

If you will never take outside money, there are still advantages to being incorporated in Delaware, but then you could consider pass-through entities like an S-corp or partnership.

Kevin Lentz

September 12th, 2014

Delaware C Corp - no question. Same amount of work as incorporating in any other state, and there are benefits - especially ff you ever expect to take funding. Delaware was the first state to offer protections to investors which is why everyone set up there. Now, other states allow the same protections, but DE is still more attractive because they have 35 years of case law that falls heavily in favor of investor protection.

I agree that you should have an attorney help set this up - only because of the prior work. You will want to issue stock correctly, get vesting agreements in order and make sure you change the boilerplate by-laws to be more founder friendly.

Giuseppe Turitto Development Manager at ServiceChannel

September 12th, 2014

Thank you everyone. Definitively we will go C-Corp (thank you Chris to clarify that S-Corp is a taxation designation). We will meet with couple lawyers next week to help us out with all of this.

Patrick McGuinness VP of Engineering, CTO, Software dev mgr, & Entrepreneur/Founder

September 13th, 2014

I have done things as a single-member LLC (here in Texas) in the early stages, with the plan to move to Delware C Corp as I being to share equity and reach out for external funding. That's the universal advice and glad to see you are taking it.

To the other experts on here - what are the typical costs associated with a conversion from LLC to C corp?
Is it just as simple to set up a new corp entity and sell the assets into it vs a conversion?

Anonymous

September 16th, 2014

Depends largely on the state. You can look it up in your state's dept of revenue webpages.

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