Why forming an LLC might be a useful setup for many startups

It's pretty easy to do S corp election in the case that investors come along, so an LLC is not a bad way to start.

For my consulting biz I did an LLC because it was cheap and easy and I can handle doing the taxes myself (All you have to do is file a Schedule C in addition to your 1040) If you do any significant amount freelance work at all (Think over $1000/yr) you are probably getting screwed on taxes and should incorporate so you can deduct stuff, or just reduce your taxable income by purchasing biz stuff on your biz account. It saved me money, and will probably save you a lot too.

Most of the single member LLC operating agreements you can find online and hack to your liking, then just have a lawyer look over it. Minus the legal fees you will probably pay less than $100 depending on the state to file ($55 in Oregon)

If anyone wants more info on this just let me know, I'd love to help.

This is not really good information for California, but then this is a syndicated article, not locally written.

If you're not going full-on Delaware C-Corp like YC does and you're going to incorporate in California, I really think most startups would prefer an S-Corp over an LLC.

Feld's VC perspective on structure: http://www.feld.com/blog/archives/001539.html

The California tax perspective: http://www.taxabletalk.com/posts/1138032374.shtml

Furthermore, CA C-Corps don't have to pay the $800 minimum franchise tax in the company's first year: http://www.taxes.ca.gov/CorpC.html

I don't think LLCs get the same privilege.

Another downside to incorporating as an LLC is that it makes it harder to try someone out when you are considering trading equity for services. If you want to see if a lawyer is going to be a good fit, or if a SEO person is going to really help you out, there is no immediate corrolary to vesting in an LLC. So it makes hiring fast/firing fast difficult to do. You don't want a large chunk of your company held up by someone if it turns out the designer you gave 2% in leui of cash to design your UI is actually a complete flake.

From what I understand, it's actually ideal to incorporate your startup rather than forming an LLC. One reason would be that many VCs won't fund your LLC given that you cannot go public.

The SFGate article offers the other view. It might be a beneficial read for someone unfamiliar with the differences.