Comment by jsiarto | Hacker News Reader

Comment by jsiarto | Hacker News Reader

I don't agree with this. It is vital to have legal separation between your company and yourself--whether that be in the form of an S/C Corp or a Limited Liability Company. I just incorporated in Illinois and it cost me about $400 through LegalZoom. They took care of everything and all the rest was handled through my accountant for another $200. That amount is trivial given the structure and protection I now have with an S Corp.

As far as the stock option package--they messed up and shouldn't have formed an S Corp. S (Small Business) Corps are pass-though just like LLC's--the shareholders pay personal taxes on the profits of the company. They also only allow you to distribute one class of stock, making employee stock options hard to do.

The author's lawyer/accountant should have told them that, but I still can't see how all that came out to a $40K mistake. Word of advice: do your research. As a business owner/CEO, ignorance is not an excuse--do you're homework and ask the right questions.

You can have a sophisticated stock option plan with an S corp.

My classic case was when I had a founder come back to me after exiting his prior company $3B richer than he started and then used tens of millions of his own money to found and fund one of the most elaborate S corps I have ever dealt with. He wanted the S status to be able to pass the early-stage losses through as set-offs against other income.

There were about 100 employees, many of whom were not U.S. citizens or permanent resident aliens and virtually all of them got stock options.

However, since the options do not technically constitute a "second class of stock" (an S corp killer if they do) and since the plan and the stock option agreements conditioned the exercise of the options on the company's first having abandoned its S status (another S corp killer is to have a foreign national as a shareholder), the plan and the whole incentive scheme worked.

This was a more complex setup than usual but not $6K worth of complexity. What it primarily required was a good working knowledge of S corps and of equity incentive plans and how to properly mix the two to achieve the client's aims.

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