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Comment by aphextron | Hacker News Reader

Can anyone explain the pros/cons of LLC vs. a Delaware C corp?

For a traditional startup, that will (i) raise money from investors or (ii) give equity to employees, you should just be a Delaware c-corporation. Those are streamlined, known, and easy processes with a Delaware corporation. Every lawyer in this space has forms for that and can read those documents with a baseline of familiarity. If you try to innovate here and set up a startup as an LLC or a California corporation, you are complicating every corporate transaction you'll do and adding cost to every interaction with your lawyer and the counterparty's lawyer. And you will prohibit investment from certain VCs who aren't able to invest in pass-thru entities because some of their LPs manage retirement money and are subject to ERISA.

There are other businesses where an LLC makes sense, including possibly for a bootstrapped startup that will have one stockholder for its whole existence. But that's not my area.

Not even going to include a disclaimer about this not being legal advice, because I am a lawyer and this is good advice :)

I would just add that tax classification and the liability protection entity are two different things. You can form an LLC and elect to be taxed as a C Corp. The upside is most states have fewer admin requirements for LLCs (e.g. you don't have to keep minutes, name officers, etc.)

As for Delaware vs. your home state (CA in this case), I think it depends on the business. If you are a multi-national corp, sure go with Delaware. But if you live in CA, the other owners live in CA, and you're mostly doing business in CA, I'm not sure you'd need a Delaware corp. Delaware has franchise taxes of its own, so you'll end up paying taxes and fees in two states because you'll have to register as a foreign corp in your home state (CA).

No dispute from me that you can save a little bit on taxes by forming a California corporation if you're in California. Specifically the ~$400 of Delaware franchise taxes. But my point is that any company doing typical startup activities will spend more than $400 extra the first time they interact with their lawyer, an investor's lawyer or the state of California.

For example - this week I'm helping someone with a simple filing in California, and the processing time is 10-12 days, unless we pay California an extra $350 expedite fee, whereas Delaware will turn the same filing around in 2-3 days with no expedite fee.

Or, for another one - in California you can't submit an electronically signed document for a filing, so you and your lawyer get to spend the extra billable time dealing with scanning PDFs instead of DocuSign.

And you get to deal with the lottery of attorney reviewers who will sometimes reject Articles of Incorporation over things that have been OK in every other document you've ever filed.

And this is all separate from the fact that the lawyers on both sides of your transaction are secretly scratching their heads while they dust off their copy of the California Corporations Code and billing your for the time they spend figuring out what's different from Delaware.

It's just not worth it for the $400.

Yes, I wouldn't dispute there are a lot of situations where organizing somewhere other than your home state is a good idea.

I'm just trying to point out that "Delaware C Corp" may not always be the right answer. It may actually only be the right answer for a very specific use case.

And on top of that, when you eventually do realize you want to change the domicile to Delaware, you find out that California corporations don't allow direct conversions into Delaware corporations, so you have to pay lawyers an extra couple thousand dollars to prepare merger documents to move the entity to Delaware.

Lawyer, but not your lawyer.

I would never advise someone to setup a Delaware C corporation unless they were very narrowly focused on raising VC funding, going public in the near term, or creating a subsidiary of a large, profitable company that uses the corporate structure. A C-corporation is the least tax-efficient and least capital-efficient structure, and you don't even get the benefit of limited liability over the LLC form because LLCs also get limited liability.

> LLC vs. a Delaware C corp?

Both Delaware and California offer LLCs, as well as incorporation options. Are you contrasting an LLC versus a C Corp, or a Delaware LLC with a California LLC?

>Are you contrasting an LLC versus a C Corp, or a Delaware LLC with a California LLC?

A Delaware C corp vs. a California LLC

See http://www.calstartuplawfirm.com/business-lawyer-blog/califo....

TL; DR If you’re raising outside financing, Delaware. Otherwise, California is probably fine. (Assuming you have a nexus in California.)

Disclaimer: I am not a lawyer. This is not legal advice. Don’t make these decisions without a lawyer.

What about a California C Corp LLC in Delaware?

> California C Corp LLC in Delaware

I don’t understand. “C Corp LLC” doesn’t make sense; you can’t be both.

Sure can. An LLC can elect to be treated as a C corporation for tax purposes with a very simple IRS form.

> An LLC can elect to be treated as a C corporation for tax purposes

Still an LLC. We’re talking about entity formation and comparing jurisdictions; being legally precise becomes important in this context.

Disclaimer: I am not a lawyer. This is not legal advice.

Still an LLC. We’re talking about entity formation and comparing jurisdictions; being legally precise becomes important in this context.

Right. It's still an LLC, for specific state legal purposes. And it's generally a C-corporation for tax purposes, federal and international law.

> it's generally a C-corporation for tax purposes, federal and international law

A single-member LLC electing to be taxed as a corporation will still be sued as an LLC (i.e. it can be pierced more like an LLC and less like a corporation), dissolved and maintained as an LLC and enter into contracts, open bank and brokerage accounts as an LLC, and have the same difficulties raising outside capital as an LLC.

Disclaimer: I am not a lawyer. This is not legal advice.

I break down the differences among entities in another post from the same blog: https://blog.bookandledger.com/topics/business-formation/int...

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