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Comment by andrew_gust | Hacker News Reader

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.

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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.

Sure, as a general rule, but conversions from LLCs to C corps can get very complicated as well in short order, especially when there have been different types of equity issued to founders/employees (e.g. profits interests, convertible notes, etc.). If the cap table is sufficiently large, it can cause ballooning legal costs pretty quickly. Not outrageously so, but companies can expect at least a few thousand to get added to the bill.

... which is roughly how much money it'll cost to have a good lawyer carefully set up a C-Corp for you.

Yup. Noting also that incorporation costs are generally a fixed ceiling, whereas the conversion costs are a likely minimum. ;)

This is exactly the part of the process that the first iteration of Gust Launch solved. All the paperwork for incorporation and company formation are streamlined and pretty easy to fill out, and included in the monthly cost. So conversion is much, much more expensive.

So it's "a few thousand" when/if the need arises vs, at a minimum, $2.4k/yr definitely.

That doesn't sound clear-cut at all.

The subscription cost isn't for the incorporation and formation. Being a Delaware C-Corp is just a prerequisite for users, so we include it as the first step.

I've never done that, but that's not the advice I've gotten from lawyers. In particular, what I've been told is that C-Corp or LLC, there's going to be annoying conversion work at your first VC round.

I just went through this. Started as LLC with co-founders. Once we started seeking money we up-scaled to C-Corp - give the lawyer a few bucks, wait a week, sign some stuff. Mostly painless.

Going to a C-Corp too early can be costly, moving up from a proven model LLC is easy, limits cost and risk

Why not use Clerky? It's about a grand all-in, and since YCombinator uses them for all their incorporations, it's what all your investors are likely to expect.

Because it generates a Delaware C-Corporation, and a DE C costs more annually to operate than an LLC. Among other things, most small business operators want pass-through taxes.

Do you have any opinion on a pass-through Delaware S-Corp vs LLC?

Hmm, I'm not sure that's accurate. What would you be converting to if your company was already a C-Corp?

A C-Corp with the structure your venture capital firms expect.

There may be more structure required but starting off from a C corp obviates the need to transfer control of assets (particularly intangible ones like copyrights to source code).

You're paying a substantial amount of money up front to hypothetically mitigate a hypothetical future expense that only occurs at the point where cash flow (at least on the order of "covering legal expenses") stops being an issue.

That doesn't sound like a good deal to me, but that's just, like, my opinion, man.

Quantify substantial.

Last time incorporated a Delaware C corp it cost me a couple of stamps and filing fees. I don't remember exactly but it definitely wasn't an obscene number. The annual upkeep, including franchise tax and registered agents, is around $600.

If you're not going to have a nexus in another state (i.e. No physical location or storefront) then that's peanuts for having a corporate vehicle in the the state for corporate vehicles.

If the cost difference of a couple hundred bucks is enough to break your bank, I'd suggest finding a 9-5 job rather than incorporating.

Can you elaborate?

Operational and structural details like this have always fascinated me.

Part of the premise of Gust Launch is that it's far simpler to start this way, as a Delaware C-Corp with expected structure, than it is to convert later. The conversions range from easy to extremely painful but they're almost all avoidable.

When it is time for fundraising, is it possible to just create a new C-Corp, then sell the assets of the LLC to the C-Corp? Are there major tax implications? Is it possible to sell the assets for a $1? Or would that be in violation of some tax rule?

As one example, the first Facebook business entity was a Florida LLC. Mark Zuckerberg then created a new Delaware based C-Corp that bought the IP from the LLC.

I believe the original trigger for converting to a C-Corp was the Peter Thiel investment.

If you buy something for less than it's worth, you have to book the difference as income. Not much difference between buying $1000 widget for $1 and buying it for $1000 and then getting paid $999.

No cash is needed to sell the assets or LLC to the C Corp.

Most likely, you would sell the assets of the LLC to the C Corp in exchange for some number of shares (valued at the pre-money valuation of the company) and then issue additional shares equal to the VC money such that the total value of the new C Corp is the post-money valuation.

Afterwards, the founders can distribute the shares and wind up the LLC.

The alternative is for the founders to sell the LLC to the C Corp for shares and then the C Corp can wind up the LLC.

I'm asking out of curiosity (e.g. I have no need to pay a lawyer or CPA to answer this): Would the founders have to potentially, or always, pay taxes on the conversion? Seems like the sale of the LLC or the assets could be recognizable gain.

It seems like it would qualify under the rules of an Other Nontaxable Exchange - Property Exchanged for Stock.[0] I think there are enough cases like this and the IRS rules are sufficiently clear that it will be possible to structure the VC investment in a way that eliminates any tax liability on the conversion.

[0] https://www.irs.gov/publications/p544/ch01.html#en_US_2016_p...

It's easy. Or the C-Corp owns the LLC, or IP assignment. Just move the assets over, not an actual sale.

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