Inc. or LLC?
What would you suggest for a startup?
An LLC is fine for a business where you expect to make your money from profits rather than a liquidity event and aren't trying to raise VC money.
Based on what I've read, LLC in your legislation may have tax benefits, cheaper and easier setup process, and less yearly bureaucracy.
CA collects at least $800 a year for all corporations operating in the state, however, S and C corporations are exempt in the first year while LLCs are not. That $800 is due about 120 days after incorporation and it's an annual minimum franchise tax, so you'd have to make like $9,000 profit your first year to recoup it.
Has anyone looked into filing an operating agreement in Nevada instead of Delaware? Among other benefits, a cursory glance at the facts seemed to indicate that the tax burden would be lower in Nevada.
Am I missing something obvious?
The primary point of incorporating in Delaware is for the outstanding legal and administrative structures they have for corporations. Not everyone is incorporated in Delaware -- Apple has always been a California corporation. But better to do it now rather than have to later.
In any state, the tax burden for a foreign corporation (one incorporated in another state) is going to be about the same as one incorporated in that state. That's because states have complete control over taxing revenue earned in their state, regardless of where entities are incorporated.
Nevada is business friendly, but since the state has no income tax, it also has a stigma of being quite popular with tax cheats. So it may increase the chance of an audit.
I've heard of strategies that involve multiple entities. So for instance you might form a Nevada entity that owns the IP and licenses it to the operating entity. The licensing/royalty fees serve to shift a fraction of your income out of state where it can't be taxed.
That's all I know. For us it'd be way too much hassle just to avoid (some of) the ~4% franchise tax.
I went for the quick and easy route. I'm looking to build a good product not a big corporation. The less time I spend having to futz with the lawyer/Accountants and Tax man the happier I'll be.
Please answer. Your response will be greatly appreciated.
Thank you.
Lynda
All corporations are C by default. You have to file a special from with the IRS to become an S Corporation. S Corporations are flow-through entities which are not taxed at the corporate level. The reason VCs require you to be a C Corporation is two-fold:
1. VCs like to have unilateral rights and terms to give them downside protection such as liquidity preference and preferential stock classes such as Preferred Shares. S Corporations are simpler entities which only allow a maximum of 40 shareholders - as your company grows and you give stock grants or options, this won't work. LLCs only allow 75 shareholders.
2. VCs will claim that a C Corp structure gives you more flexibility. This is marginally true, but LLCs give you the same flexibility with slightly higher administrative cost but you can maintain the flow-through status which is advantageous.
The real reason is they want preferred shares and special rights. Stay an LLC or S Corporation if you don't need institutional investors. Angels are happy to invest in well structured LLCs or standard subchapter S Corporations.
http://www.amazon.com/Entrepreneurs-Guide-Business-Law/dp/03...
In general, I think too many young entrepreneurs give up too much equity too quickly because they fall for the "oh we're making the pie bigger so giving us a huge percentage is fine" fallacy.
There are so many things to take into account when taking VC money. Too many VC firms replace young CEOs quickly at which point the founders get heavily diluted. Also be careful of VCs that try to reserve too large of a pool for management they want to recruit.
Management team members recruited by your VC work for the VC, not for you, the CEO. When push comes to shove, they will side with the VC because they know the VC will find them another job if your start-up goes bust.
The golden rule of VCs is this: He who has the gold makes the rule.
- There is a special election you can make when you sell the company that allows you to sell the assets instead of the equity which is something you can get the acquirer to pay more for because they can get a stepped up basis at market value and then depreciate it to create tax savings.
I don't remember the exact research, but I believe subchapter S corporations that undertake the election sell for 10% more than companies that cannot or do not take the election with all other things being equal.