Comment by tptacek | Hacker News Reader

Comment by tptacek | Hacker News Reader

Note that while these are probably the best practices for a company that knows it is immediately going to take funding, LLCs and S-Corps are valid choices for companies that aren't sure or that are going to be making money before they take funding.

The S-Corp in particular has some attractive features: it simplifies equity grants to employees compared to an LLC, and taxes are easier to deal with in a C-Corp (there's also a sort of notorious salary-vs.-distribution trick people place with S-Corps to reduce their taxable income).

The LLC is incredibly easy to set up; you can probably get one via 1-click on Amazon now.

In the only company I founded that took serious VC, I didn't handle any of the legal, but the sense I got was that legal for a real VC round is so innately expensive that the S-to-C conversion isn't a big deal by comparison. It's most convenient for everyone if you're not even incorporated, but that's their problem (it is dumb to do business without incorporating); if you're worth funding, nobody is not going to fund you because of the cost of converting to their preferred structure.

The #1 reason not to go the LLC route when you start is if you are not the solo founder. If you have co-founders, please, please, save yourself years of agony, start with a C-corp and proper vesting in place upfront.

If you wonder how to split equity, check out the co-founder calculator I wrote at http://foundrs.com/calculator/index.php - it's fun to play with :-)

If you're going to have employees and those employees are going to have formal equity as part of their compensation, the simplest structure to use seems to be the S-Corporation.

If you're not granting options to employees or you're just 3-4 founders, you can get the same effect as vesting with buy-sell agreements.

You can do vesting in LLCs (at least in most places, right?). You need a lawyer in any case.

Indeed, the author notes in another post (http://startuplawyer.com/incorporation/accountants-heart-llc...) that the LLC is a fine choice except in situations when you expect to "(i) raise capital, and/or (ii) issue incentive equity compensation". Most posters here are probably thinking about that kind of start up, but not every new venture needs to worry about raising outside capital.

> you can probably get one via 1-click on Amazon now

That is almost literally true, only it's Nolo instead of Amazon.

Why is it dumb to do business without incorporating?

Because when you sign any contract with a commitment in it and you're not incorporated, the liability attaches to you personally. This may sound natural but it is not the natural order of things for businesses. You should not be at risk of losing your house simply because you can't pay your bandwidth or office bills.

Agreed. The primary issue with an S-to-C conversion is that any assets with built-in-gain (i.e., worth more now than when they were acquired) may result in "immediate" income to the corporation. This is not an issue for most startups, unless they start off spending lots of money (i.e., Color). (Also, "immediate" in tax world really just means they'll be part of that year's income.) The conversion itself is otherwise tax-free at the federal level, and in most (but not all) states.

LLCs, however, are a frigging nightmare. They're the most difficult form of business entity to set up (except for non-profit 501(c)(3)'s). Accounting for LLCs will require an experienced (expensive) accountant. Plus, state laws on LLCs aren't uniform in the states that matter.

That hasn't been my experience with LLCs. If you're making money and you're a founder, you need an accountant full stop. But having said that: you make distributions, and the principals pay self employment tax. Where's the big deal?

Here's where I get jumpy on this stuff:

S- and C- corporations are complex enough to put people off until they get a lawyer. Most startup founders probably don't have a lawyer when they start.

When you say "LLCs are a nightmare", besides the fact that they're aren't for most people (they aren't even notably complicated for most people; that's the point), and that it's not that hard to switch out of an LLC when things get complicated (by that point, you have a lawyer)...

... besides those things, you're also probably effectively talking people out of incorporating at all. That's more than suboptimal; it's dangerous. It creates situations where you can be personally liable for all sorts of company expenses. We've had HN posts from people who were told by cofounders and business partners that they were personally liable for huge expenses, and had those same people discovered they owed zero because they were incorporated.

Don't do business as a sole proprietor. Get a structure with limited liability as soon as you can. If it's between an LLC now and an S-Corp "maybe 6 months from now, maybe earlier if we can find a good lawyer and we're making money" --- do the LLC.

You're the expert here. Where am I wrong in this analysis?

Freaky. People. Guy's a lawyer. Don't mod him down on a legal comment. Jeepers.

I wonder why would somebody go with S-corp instead of C-corp if they plan to be big (meaning raise money)? Majority of startups will not have enough of profit to pay founders at the beginning, so tax advantage does not look very appealing.

LLCs, however, are a frigging nightmare. They're the most difficult form of business entity to set up (except for non-profit 501(c)(3)'s). Accounting for LLCs will require an experienced (expensive) accountant. Plus, state laws on LLCs aren't uniform in the states that matter.

Funny, setting up our LLC took about 20 minutes of filling out forms and mailing them in. I've heard it's different state-to-state, but in the state we set up in (Virginia) it was not terribly harder than buying a new cell phone...and less money.

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