LLC vs. S-Corp vs. C-Corp | Hacker News Reader

LLC vs. S-Corp vs. C-Corp

launchside.com

105 pointscolbyaley77 comments

I am sure the author of this article intended to help others make wise tax/entity formation decisions but many of the facts mentioned are just incorrect (tax rates and some general tax concepts). C-corps are fairly uncommon nowadays and for good reason You are almost always going to pay more tax in the C-corp and you will face built in gains issues when you realize this and decide to elect to be an S-corp.

The tone of the article seems to be slightly rushed and frustrated and leads me to wonder if the author just received unexpected news from his accountant.

One example:

Using 2013 tax rates and assuming that the taxpayer is single:

Individual Federal income tax on taxable income of $90,000 (ignoring personal deductions/exemptions/itemized deductions, etc..) that the example taxpayer in the article might have to pay if they were a 50% partner/member in an LLC:

Roughly $18,493 (less than 21%)

Corporate Federal income tax on $100,000 if you and your partner had a C-corp instead and took 40k salaries then left $100k in the company.

Roughly $22,250 (About 22%)

But then if you end up not spending that money because you made a boatload of cash the next year and want to take it out:

$3,337 (15% capital gains)

leading to a rough total of $25,587 (over 25.5%).

You might look at this example and say "hey that's just a few %" but as the income in question grows, so does the gap.

Edit: The real reason startups might end up as corporations is for the beneficial tax treatment investors can receive as holders of small business stock (1202, 1244).

>C-corps are fairly uncommon nowadays and for good reason You are almost always going to pay more tax in the C-corp and you will face built in gains issues when you realize this and decide to elect to be an S-corp.

I think you are correct few start-ups and small businesses will ever incorporate and be taxed as a C-Corp. However, there are limitations to the S-Corps, such as a max of 100 shareholders and I think prohibitions foreign shareholders, so any public company is generally going to be C-Corp, the major exception I can think of are publicly traded banks who are N.A.s

My understanding is that a C-Corp also has much simpler paperwork around tax time.

NOPE.

C-corp taxes are subject to all sorts of rules. You can't do C-corp taxes on your own except in the most simple of circumstances. You definitely need a CPA (and a good one) if you're going this route.

It's not really hard / expensive to find a CPA that can do C-corp taxes, at least in Silicon Valley.

I didn't mean so simple you could do yourself; I meant simple compared to S-Corp.

A C-corp and an S-corp are equivalent in all but a few ways:

An S-corp is restricted in the total number of shareholders, and the classes of stock. It also can't have retained earnings. That's it.

S-corps aren't really popular any longer. Everyone who might have benefited from an S-corp is choosing to form LLCs instead. Less paperwork. Less formality. More flexibility. It's essentially a partnership with the limited liability of a corporation.

Heck, even AOL was an LLC for a while.

This is not legal advice*

I agree with the sentiment of your edit but would like to expand.

The key factor in an early stage company structural organization should be external risk reduction in relation to the founders and seed investors (they are already taking plenty of risk) while providing maximum return and low compliance costs. An LLC provides for this. If "institutional" investors come along then a change to a C-corp is trivial and low cost (when discussing securities sales it is almost non-existent if you are already selling LLC unit securities). The motivation being that the VC/Institutional investors are subject to a different tax structure if they buy units as opposed to shares (due to pass-through). So re-organizing as a result of an offer is completely reasonable in my opinion, just be upfront in discussions. This allows the LLC seed investors to take maximum profit and minimum risk during the pre-VC stage.

If you wish to contribute more to the business while organized as an LLC you can simply increase distribution percentage and have investors (yourself included) buy more Units (this eventuality must be prepared for in the original organization by providing enough units). And yes there is an element of "sales" to this with the current investors but if they bought in once and you paid them they should buy in again.

Can you clarify this:

"But then if you end up not spending that money because you made a boatload of cash the next year and want to take it out:"

Why would you have to pay taxes again? Sure, you can pay taxes on the growth, but you wouldve paid taxes on the growth even if you had taken it out.

Clearly I'm missing something, so please clarify :-)

Because in a C-Corp, the earnings don't pass through to you personally. They belong to the corporation. So you pay tax on them at the corporate tax rate. Then when you personally want the money, you have to pay it to yourself as income. It gets taxed AGAIN. That's basically the only way for you to get the money. The idea is that with a C-Corp, if you want cash you earn in the corp to ever become your personal money, you have to take it out the year you earn it, otherwise those dollars will be taxed twice.

> Corporate Federal income tax on $100,000 if you and your partner had a C-corp instead and took 40k salaries then left $100k in the company.

> Roughly $22,250 (About 22%)

I think your shot-in-the-dark about getting "unexpected news from his accountant" is close to the mark, because the author didn't seem aware that the C-corp would have taxed the $100K at all. The comparison point was completely missing from the article.

The other missing point about C vs S/LLC: Later on, when the corp has grown like a weed and it's time to take money, there will be a double taxation under C that is very disadvantaged.

Honestly, this is a case where the HN commentary is better than the article it points to.

This guy is focusing on taxes when the better question to answer would be: "What corporate structure makes sense for you given your goals?"

There are a whole range of issues to consider of which taxes are but a single one. All sorts of things can complicate this which is why you need to really do your homework before you set up a structure.

For one thing, the author doesn't understand "retained earnings" in a C-corp. You can't just let that cash pile up indefinitely. There are "retained earnings" taxes that can hit you pretty hard if you're not doing things right. You also will get hit with the dreaded double-taxation issue once you do decide to take the cash out. And he's totally neglecting the issue of STATE corporate taxation which adds another layer of complexity to think about.

You choose your structure based on who is putting in money, how involved they will be in the business, what is at risk, and who gets what if the company is successful. That's it.

C-corps are fairly uncommon nowadays and for good reason

This is a bit misleading for people looking to start your typical startup (using PG's definition of 'startup'). All those startups you read about raising money - want to know how many of them are C-corps? Just about 100%.

One thing that many people don't realize is that for many startups, those pass-through tax benefits of LLCs and S-corps are largely illusory, since they're not going to be profitable at that stage anyways.

Starting off as an LLC means you're going to introduce delay when you start raising money (unless you're really on top of things and convert in advance of fundraising), which introduces deal risk.

Yes, there is double taxation on income from C-corps, but most startup founders aren't in it for the salary / dividends, they're in it for the eventual acquisition / IPO (or these days, private market sales). Gains for QSB stock held more than 5 years are now tax-free under Section 1202.

There's a whole bunch of reasons why companies end up as corporations - not just the QSB stuff. Main street small businesses are often fine with LLCs or S-corps. Startups (as defined by PG) should really talk with an experienced startup attorney before going the route of an LLC or S-corp.

You say starting off as an LLC means delay at fundraising. Unless you're advocating running entirely unincorporated, I think this is backwards: it is harder to convert your C corp to the form the investors will want than it is to convert an LLC. This was my understanding before last week, when YC's finance person confirmed it (at least as far as YC is concerned) on HN.

Thanks for pointing that out - I should have been more careful with my words. What I meant to say is that most startups will be better off starting as a C-corp, provided that they use market-standard paperwork (i.e. the forms that the major Silicon Valley law firms use, which many of them provide for free) and don't mess anything up (which is consistent with what Kirsty was saying). Of course, I suppose the "not messing anything up" part is harder done than said (which is why YC companies are lucky to have Kirsty) :)

YC will only invest in C-corps (though they'll help you convert if you're not one already).

Source: http://news.ycombinator.com/item?id=5193914

90% of my clients forming new businesses in the US last year chose the LLC form for legal purposes (only 1 client formed a new C-Corporation, which they did solely for legal requirements). They split 50/50 between pass-through and corporate treatment for tax purposes.

LLCs are relatively easy to convert to a C-Corporation, as are S-Corporations (which can automatically convert to C-Corporations). C-Corporations are generally very difficult and very expensive to convert to other forms.

So, C-Corporation status is great if you know that you will be getting VC funding. It's not so great if you only think you want VC funding, and it's a relative nightmare if you are trying to bootstrap.

I've heard leading lawyers at the Silicon Valley firms recommend that any start-up seriously seeking VC funding choose a Delaware C-Corp.

The main reason being that investors do not want to deal with the pass-through income associated with an LLC or S-Corp.

(Of course, this is not legal advice, and you should speak to your lawyer.)

You will not stay LLC or S after taking a round of funding. But you won't keep your C corp either, because there are lots of details you will get wrong in forming it. It is very straightforward to convert a sane LLC to the C corp that investors want. It is not as straightforward to convert your C corp to theirs.

Being in a higher tax bracket doesn't lead you to pay more tax on your initial income, only a higher rate on money above a certain threshold. That said, the article is right in that an S-Corp or LLC sound right and are rarely a good idea because you sometimes lose out on certain tax deductions because your personal income is too high. Remember though, a tax bracket is a sliding scale... see the margin tax rates table at https://en.wikipedia.org/wiki/Income_tax_in_the_United_State...

This is correct, and worth pointing out, because the OP has this line:

>So now you owe an extra 10% on your $40K salary which is $4K. And you also owe 35% on that $50k which is around $18K.

Which is false. The extra 50k is taxed more than your first 40k. Your overall effective tax rate increases, but it's incremental. Your first 40k is taxed the same with or without the extra 50k, but the extra 50k is taxed at a higher rate because it's in a higher marginal rate.

YES! It's so annoying how few people understand this. People are never "in a tax bracket" -- only money is!

Your first $40k may be taxed at 10% and your next $20k may be taxed at 15% or whatever, but you are not "in a tax bracket".

The idea of being "in" a tax bracket gave rise to the dumb idea that making more money can net you less after taxes, which is virtually never the case.

Sorry, but it may be dumb, but it's true. Making more money can lead to less take-home pay. One really good example is if you hit the AMT (alternative minimum tax.) "Your money" is not in the AMT-- you are. And it often means that a raise can end up costing you money. There are also similar situations where getting a job can mean losing out on welfare, leading to you actually having less money to take home.

Yes, the AMT is the one case where you could end up with less take-home. Its an exception to the normal functioning of the tax code, though, and it works by prohibiting most permissible deductions. Thus, while the statement about the AMT decreasing take-home with increased is factually correct, this does not happen through the bracket system. GP was clearly addressing the misconception that people move into tax brackets and must pay higher tax rates in all their income as a result.

Your welfare example has nothing to do with taxes. Welfare benefits are set by gross income level with some COL and other local adjustments. Your tax status is irrelevant.

UGH.

People in the USA forget that we have TWO tax systems.

One is the regular tax system that everyone knows and loves to hate.

The other is the closest thing we have to a "flat tax" and it's called AMT. It has different rules and different rates.

When you do taxes, you compute your tax liability using BOTH systems and you pay the HIGHER amount. That's how it works.

I pay AMT and it sucks.

There are a ton of places in the tax code where making more money results in you keeping less of it. For example if you sell more than X dollars worth of goods on eBay, you have to start paying tax, which will cost you dear. So the jump from X to X+1 ends up costing you. I think X = $500, but maybe they changed it.

The IRS even reduces your taxes if you lose money in the stock market, if your business property depreciates, and so forth. I like to refer to those cases as "the government paying you to be a loser." Just another case where doing better means you do worse.

Let's not even try to pretend this is a fair or well-designed system. Even Warren Buffet, surely one of the greatest beneficiaries of the system, has spoken out against it.

The article said,

"So now you owe an extra 10% on your $40K salary which is $4K. And you also owe 35% on that $50k which is around $18K."

Based on the numbers, this is clearly a misunderstanding of how tax brackets work, and not anything to do with the AMT.

This is absolutely false, making more money can make you subject to the AMT (and potentially a higher marginal tax rate), but you will never be in a situation where if you make an extra $1000 you'll owe an extra $1001 in taxes.

It's a little more complicated than that:

> An LLC with either a single member or more than one member can elect to be classified as a corporation rather than be classified as a partnership or disregarded entity under the default rules discussed earlier. File Form 8832, Entity Classification Election, to elect classification as a C corporation. File Form 2553, Election by a Small Business Corporation, to elect classification as an S corporation.

http://www.irs.gov/publications/p3402/ar02.html

Nobody does this. You give up the benefits of pass-thru taxation that you GAIN with an LLC. You're essentially volunteering to be taxed TWICE if you make this election.

With all due respect, this article really isn't that great.

Here's the real difference, stated succinctly:

LLCs and S-corps are pass-through entities that aren't generally subject to regular corporate income tax like C-corps are. (But there are exceptions, like NYC, which taxes S-corps as if they were C-corps.) Additionally, C- and S-corps can issue stock to owners and investors, while LLCs cannot, but S-corps are restricted in various ways that C-corps are not, like not being able to issue stock to foreign investors, having only one class of stock and no more than 100 stock owners.

VCs and Angels will not invest in an LLC, and the process to convert an LLC to C-corp is (or was, last time I checked) difficult, typically involving the formation of a brand new C-corp that buys the LLC and then dissolves the assets of the LLC into itself. I believe Joel once mentioned that FogCreek went through this process years ago, and it was not very pleasant. By contrast, it is trivial to convert an S-corp to a C-corp with one form (IRS Form 1120).

If you ever plan on issuing stock or taking outside investment, start out as a C-corp or S-corp. If you plan on running a business that won't (or can't) issue stock or accept outside investment (like a law firm or medical practice), then form an LLC.

I started as an LLC and had to covert to a C-Corp. Paid a lawyer to do it, but it really wasn't hard at all. Of course we also didn't have many assets at that point.

This is an aside, but needs to be said: if you're going to offer a mobile specific layout for your website, test the damn thing first. It's extremely jarring to have share buttons on the left side covering up the first letters of each line. I can't even zoom out so that the text fits. If you're really so desperate for people to talk about your post that you'll cover up the post in order to achieve that, at least put it at the top.

What isn't mentioned here is that an LLC is relatively straightforward to set up, an average Hacker News reader could set one up in their state with a few hundred dollars and no lawyer. S-Corps are more complicated (you will need a lawyer), and C-Corps are VERY complicated (you will want at least 2 lawyers). The amount of legal fees and time spent creating the different corporations varies immensely. It's not as simple a comparison as just "tax code". If you are not sure what kind of corporation you want to set up, I highly recommend you spend a few hundred dollars and consult a lawyer for advice. The internet is a terrible place for legal advice.

Source: I own an LLC, and consulted a lawyer about C-Corps and S-Corps.

"What isn't mentioned here is that an LLC is relatively straightforward to set up, an average Hacker News reader could set one up in their state with a few hundred dollars and no lawyer."

This is true but it should also be noted that in some states you can get taxed a significant amount of money per year on your LLC. California, in particular, has an $800 minimum tax per year on LLCs, regardless of whether you've earned a single dime.

$800 a year isn't much if your LLC is an actual money making venture, but is pretty significant if you are just using it for what amount to basically side projects.

California's $800 minimum corporate tax also applies to S-corps and C-corps. Also, to correct a common misconception I often hear (not in your particular post, but in general when I talk about this), registering your corporation in another state does not exempt you from the minimum tax. If you, the corporation's officer(s), live in California, you must register with the state of CA as a foreign corporation (foreign in this instance meaning out-of-state), and pay the $800 minimum tax.

Do not try to get around this--California will hunt you down.

An LLC may be easy to set up, but maintaining the personal liability shield is non-trivial. I'd recommend getting advice from a lawyer no matter the route taken.

What do you mean by this?

Please expand on this. It's quite a bold statement to make without giving at least basic details about what non-trivial issues you are referring to.

With liability protection you want two forms of protection. The Founder(s) needs to be personally protected from the company liabilities, and you want to company to remain protected from the liabilities of the Founder(s).

For example if you form a "single member" LLC, or a LLC with 1 owner, because LLCs are partnerships Court's will not protect the LLC from the single Owner's liabilities because there are no partners to justify protecting the business. So if the Owner has debts, the creditors can go after the the LLC as a asset to cover the debt.

So while anyone can set up an LLC easily on their own, as in this hypothetical it would have been worth the money to talk to an attorney before forming and have the lawyer advise to and another second owner and receive protection with the LLC or form a corporation instead of an LLC as a single owner.

Wyoming offers a lucrative incorporation package, you dont even have to live there.

http://wyomingcompany.com/wyoming-corporations/

'because LLCs are partnerships' huh? Single Owner LLCs exist specifically to protect the personal assets of a owner from the creditors of the LLC, IFF the LLC was the signatory on the debt, rather than the owner (if you have to provide an SSN to secure the debt, it's probably in your name personally, rather than in the companies name). Courts will protect the owner, as long as the owner keeps their personal finances and the company finances (and activities) entirely separate - pay a salary to another account, etc. If there's any mixing, you get screwed. C-Corp/S-Corp doesn't change any of that at all from a single-owner perspective though...

I think you are misreading what he wrote. With a single owner LLC, the owner is protected from LLC liability, but the LLC is not protected from owner liability. Search for "LLC charging order protection" for more info.

Thank you so much, I posted like 5 times about this nuanced point in the law, everyone jumped all over it down to calling it legal malpractice. You seem to be the only person to make the distinction between: Company liable for Owner Debts vs. Owner Liable for company debts

I acknowledged your point in my post, a single member LLC Owner is protected from the liabilities/debts of the LLC. Consider the distinction I made that you missed - where the single member LLC lacks protection - the LLC can be liable for the personal debt/judgments of the single member LLC Owner.

In contrast, multi-member LLCs and Corporations (C or S; single shareholder or multiple shareholders) are protected from the personal liabilities/debts of Owners. In practice, if Person A owned Google Stock A's debtors can not go after Google and Google's assets to satisfy the debts; however, if A is also the Owner of a single member LLC those same debtors CAN get a charging Order, Economic Interest, or foreclose (take ownership) of the single member LLC and/or its assets.

See: Olmstead v. Federal Trade Commission http://www.floridasupremecourt.org/decisions/2010/sc08-1009.....

IANAL, but some basic details:

There needs to be a strict separation between the corporation and the people behind the corporation. As part of this, the LLC's finances need to be kept rigorously firewalled from personal finances — never pay a corporate bill from your own pocket, for example, or vice-versa.

You also need to follow the formalities of a corporation by keeping formal records (minutes, shareholder acts, etc.).

If you fail to do either of these things you, in addition to the LLC, can be sued, and you can lose personal assets. It's called 'piercing the corporate veil'. A great run-down is here:

http://www.nolo.com/legal-encyclopedia/personal-liability-pi...

> There needs to be a strict separation between the corporation and the people behind the corporation. As part of this, the LLC's finances need to be kept rigorously firewalled from personal finances — never pay a corporate bill from your own pocket, for example, or vice-versa.

This is true about all formal business structures. They should always be separate from your personal finances.

> You also need to follow the formalities of a corporation by keeping formal records (minutes, shareholder acts, etc.).

Not true. LLCs do not require the record keeping that corps require. The only formal records you need to keep are contracts / member & manager agreements.

> This is true about all formal business structures. They should always be separate from your personal finances.

This is more than "should." In an LLC, co-mingling finances can expose you to personal liability, which can result in personal financial disaster if you get sued.

> LLCs do not require the record keeping that corps require

We're both sort-of wrong on this one: the LLC record-keeping burden is far lower than a corporation, but the burden is not strictly limited to your list:

http://www.nolo.com/legal-encyclopedia/llc-record-keeping-ru...

...in general, the law is much more complicated than one would expect. If you want to be safe, you should either be spending time reading NOLO's documentation or money paying a lawyer.

You can elect for your LLC to be taxed as an S-corp for free. Just a few forms to file with the IRS.

There are many considerations so talking to a professional is always a good idea but remember:

LLC = Lawyer's Likely Choice

A Georgia LLC can choose to have some or all of its net income left in the company and taxed as C-Corp with the remainder distributed to shareholders as S-Corp. Its very flexible and there is no preset position. You look at your cash position come tax time and decide how best to deal with it.

One problem with the reasoning in this article: reinvested earnings usually don't sit on the company's balance sheet as cash -- they're reinvested into the business as wages, advertising, and other expenses, all of which reduce profit (but increase long-term enterprise value).

If you own a lot of proprietary IP, go with the C corp, otherwise if you're running an asset-light cash business where most of your revenue flows through to profit or pays short-term expenses (e.g consulting), a pass-through entity (LLC/S Corp) is probably better.

1. Why is the C corp better for companies with a lot of proprietary IP?

2. Which way would you classify the typical software/web startup?

One of a typical web or software startup's most important assets is its product (which argues that they "have a lot of proprietary IP").

But they are also "asset-light cash business" in the sense that they don't have to have a ton of buildings or physical inventory like e.g. a manufacturing startup would, their physical footprint might consist entirely of one small leased office with a few computers.

I was given the advice I repeated above by an accountant a while ago. Admittedly, I don't recall the reasoning as clearly as I did when first told, but I think the basic idea is that it's more tax efficient to reinvest profits into a C corporation than a partnership or other pass-through entity.

Let's puzzle it out. C corporation math:

$1 revenue in let's assume a 50% operating margin, gross profit on $1 of revenue = $0.50 throw in another 10% for SG&A (sales, general, and administrative -- stuff your company does that isn't cost-accounted to production), we now have $0.40

Delaware has an 8.7% corporate income tax, reducing our $0.40 to 36.52 cents of free cash, which can be paid out to investors as a dividend or retained in the company for future growth.

If paid out, qualifying dividend tax would apply, leaving our investor with about 31 cents of profit. If kept in the company, shareholders would have 36.52 cents to reinvest.

Pass-through math: $1 revenue in Net profit: 0.40 (same as above)

Irrespective of whether profit is distributed or retained, and assuming a 28% individual marginal rate for partners, the partnership is left with 28.8 cents of post-tax profit that they can reinvest or distribute (take out for themselves). A few points from this example:

It's basically a wash tax-wise (28.8 cents vs. 31) if the profits are distributed. If profits are reinvested, the C corp has 36.5 cents of the original dollar left vs. 29-31, which will compound very significantly over time. So for a business that pays out most of its profits each year and doesn't reinvest (e.g. typical consulting company), it's likely better and simpler to use a partnership, whereas the C corp is better served for "asset heavy" companies with things that depreciate over time.

Software is tricky because even though it's an "asset" in every sense of the term ("probable future economic benefit", can be sold, etc.) most accounting systems don't recognize it as such. You should really get a CPA's advice on this, but I think the bottom line is, if you're going to (1) earn profit (most startups don't for a long time) and (2) reinvest a lot into the company, you're likely better off with a C corp, otherwise, for a cash business where most profits are paid out right away (law firm, ad agency, medical practice) you're better with a passthrough entity.

Hope this helps

Author is likely incorrect about the C Corp retained earnings taxes, the tax owed for 100k of profit for Federal only would be more like $22,500 as the 15% rate is only for your first 50K of profit.

The corporate tax rate is very high and should really be thought of as 35% if you have meaningful profit.

You may also be able to defer profit if you're delivering service after you're paid for it (and you should be doing this), this keeps more money in the company without paying the taxes immediately. A far more important lesson.

Warning for anyone reading. There is a lot of wrong information in this thread as well as the OP. If you seek incorporation guidance, consult a professional attorney and CPA.

Here’s the snag. If you are using a pass-through entity such as a LLC or S-Corp that money you are leaving in the company (retained earnings) is personally taxable to you in proportion to your ownership of the corporation.

LLCs and S Corps can be taxed like a corporation and not as a pass-through entity.

Why does any of this matter? If you need a particular corporate structure for an equity investment or other purposes, you form a new corporation that buys the assets of the old business, and life goes on.

A C Corp is absolutely nuts for anyone starting out, unless you just want to pay your taxes twice.

Can you expand on this?

Not really, it just seems pretty obvious to me. A lot of founders seem to get hung up on whether to use an LLC, an S corp, a C corp, or some other structure. In my experience the question can be answered pretty trivially: create an LLC unless there's a reason not to create an LLC, in which case you probably want a subchapter-S corporation.

The issue of where to incorporate seems to be more important for C corps where the taxes aren't reported directly on the owners' returns. IMHO it's a waste of time and energy to try to anticipate the exact corporate structure that a future VC round, IPO, etc. will require. Start out by considering only what makes sense from your own tax perspective, then re-elect/recreate the business later on if you need to, registering it in another state if necessary.

The article suggests, but doesn't explain why LLC / S-Corp is better if you are taking all the money out.

It feels to me that if you don't have to retain any money, then they both collapse to the same situation more or less. The only difference being C-Corp needing more expenses in accounting (and maybe legal) to just keep the books in order, but that is not a significant factor.

If you plan on taking the money out of the company immediately, the LLC/S-Corp is better because the company doesn't pay any tax on that income – it "passes through" to the members as regular income. Therefore, it's only taxed one time. With a C-Corp, the corporation pays taxes on its income for the year, and any money paid out to the shareholder is taxed at 15%. Thus, the actual earnings of the corporation are subjected to double taxation, which the LLC/S-Corp can avoid. The potential problem with an LLC that he's referring to is that LLC members are taxed on their share of annual income, whether or not it is actually distributed out.

the best advice i can give you after answering so many tax questions in HN is to ask a professional... especially after reading this =)

This is not legal advice.
The article focuses on a very small tax issue that should not be determinative of business structure. The way a Start-up should decide to form a business generally should be as follows:
1. State - generally always choose the State the Founder is physically located. If you choose Delaware or another State you are not physically located, you must "qualify" your business to do business in every State you have a physical presence - failure to qualify may negate any protections offered by the business structure.
2. Structure -(Corp (S or C) vs LLC) This is determined on a two part analysis: First, I start with liability, CPAs typically only look at the tax issue, you want to ensure the Founder(s) will not be liable for business debts and the business can not be liable for Founder's personal debts. Example, I would always advise against a "single member" LLC because an LLC is considered a Partnership, thus Courts will not enforce Partnership protection where there are no Partners (ie, single member) and the LLC can be liable for Founder's personal debts - on the other hand a CPA will usually recommend single member LLCs because they are taxed like a sole proprietorship(make filing taxes really easy). Second, should be the tax issue, if multiple Founders I suggest LLC, especially when there are foreign Founders, if it is a single Founder then I suggest Corp. and S status if qualified.
3. Cost- This should never be determinative but taken into consideration. The cost of forming/qualifying Corp and LLC can vary greatly among the States. Additionally, compliance (annual reports, state taxes) among the States can vary as greatly as well as the cost of compliance and the penalties for failure to timely file can be very costly.

I know the word in SV is that Start-ups must be C-Corps incorporated in Delaware in order to receive funding. My thought is that if a Start-up is already incorporated/organized and has not received funding the Founders can easily: 1. "Domesticate" their business entity to Delaware, if an LLC perform a Conversion to a C-Corp., or 2. Dissolve and have the investors attorney's draft the new Delaware Articles of Incorporation.

As to the tax issue discussed I did not notice the article discuss that an LLC can be taxed as a C-Corp and if qualified elect S status. Also, playing the game of minimizing salary and maximizing distributions, while obviously beneficial because an owner only pays payroll and FICA on salary not on distribution, becomes a dangerous game that may result in the IRS knocking on the door. However, to the best of my knowledge the IRS has only ever gone after S-Corporations in such situations and have not set a precedent of going after LLCs.

> Example, I would always advise against a "single member" LLC because an LLC is considered a Partnership, thus Courts will not enforce Partnership protection where there are no Partners (ie, single member) and the LLC can be liable for Founder's personal debts

Is this actually true? I keep reading stuff like this on the Internet, but the corporate law textbook "corporations" by Alan Palmiter indicates otherwise. It would be nice if people qualified their opinion by referencing actual cases or studies.

Olmstead v. Federal Trade Commission

http://www.floridasupremecourt.org/decisions/2010/sc08-1009....

This is not true. A single-member LLC gets the benefit of the personal liability shield.

However, as with any limited liability form, you can get the liability shield pierced if you don't properly organize and operate the LLC.

Because a single-member LLC has only one member, it might more likely to get the liability shield pierced since there isn't more than one party watching the documents and "formalities." (I put formalities in quotes because LLCs have very few formalities).

Source: Advising Small Business by Steven Alberty, Section 7:17.

>Source: Advising Small Business by Steven Alberty, Section 7:17.

Not to be condescending but good luck citing that in Court.

>>Example, I would always advise against a "single member" LLC because an LLC is considered a Partnership, thus Courts will not enforce Partnership protection where there are no Partners (ie, single member) and "the LLC can be liable for Founder's personal debts"

Re-read what you quoted, specifically focus on, "the LLC can be liable for Founder's personal debts". Your response: This is not true. A single-member LLC gets the benefit of the personal liability shield. Allow me to return favor and say "this is not true." While the Owner of a single member LLC may be protected against the LLC liabilities, that same LLC can be liable for the personal debt/judgments of the single member Owner.

The Florida Supreme Court recently issued the Olmstead v. Federal Trade Commission case. The case's holding is that F.S. 608.433 (4) allows a court to order a debtor to surrender "all right, title, and interest" in the debtor's single-member LLC to satisfy an outstanding judgment, unlike many other states where the sole remedy is a charging order.

Agreed, it's a good thing the article is not legal advice because it's got so many basic errors that it would constitute actionable legal malpractice.

To clarify: an LLC means a "limited liability company" so the owners have limited liability. Their loss is limited to their investment. If the corporation's debts/losses exceed their investment, they don't have to pay those debts/losses out of pocket. The exception is the "piercing the veil" doctrine, which applies where the LLC is not being run as a separate business entity, i.e., it is financially or legally not treated as an independent entity by its investors, i.e., because they never have organizational meetings or they do not maintain separate bank accounts for the LLC. This risk is greatest with single-person LLCs, but can happen with any LLC.

>Agreed, it's a good thing the article is not legal advice because it's got so many basic errors that it would constitute actionable legal malpractice.

I would have simply said read the reply to the post above, but your so out of line that it needs to be addressed. Your copy/paste "analysis" only examines liability of the single member Owner for the LLC liabilities. What about the company being liable for the owner's liabilities? If you are a single member owner and have personal debts/judgments, the debtors/judgment holders can not only take economic interest in your business but actual equity (ownership).

"it's got so many basic errors that it would constitute actionable legal malpractice." First, you clearly do not know the elements of legal malpractice. Second, if you actually read my post, I made it clear a single member Owner is protected from LLC liabilities.

Any thing else you think is an error?

Firstly, I am skeptical that the author uses the word 'thru' so much.

Secondly, if I were to take all the money personally, and then say, buy something useful for myself that my business could really use too, instead of retaining money on paper, does that not work?

If you do this, there's a good chance you're throwing away the main benefit of having a corporation!

Specifically, "intermingling of assets of the corporation and of the shareholder" [1] is a reason that can be used in court by creditor(s) of your business to hold you personally liable for its debts.

[1] http://en.wikipedia.org/wiki/Piercing_the_corporate_veil#Uni...

Good overview showing what's really important.

Now it makes sense to my why big companies have all of these.

eg: amazon inc AND amazon llc.

S Corps are referred to as "Professional Corporations". Their intended purpose was for Doctors, Lawyers, Consultants etc. and other people looking for liability protection for services they provide. I believe in some states they even restrict the number of shareholders.

Take that for what it's worth.

A PC is actually different from an S Corp! I haven't read the article yet but felt the need to reply to this. States also don't have S-corps, they are a construct of the IRS and an LLC or a C-corp can elect to be taxed as an S-corp but it doesn't change their legal entity form. The shareholder limit is 100 and there are a few other nuances but the general idea is that you can elect for your corporation to be taxed as a flow through so as to avoid double taxation.

A Professional Corporation is different from an S-Corporation. The S-Corporation is an IRS classification of a regular corporation, while Professional Corporations are a different type of corporation created at the state level. Professional Corporation owners are limited to the profession it is aimed at. So they must be, for example, all lawyers or all doctors. They are generally used for professions that require a state license.

OT rant. The goddamn social sharing toolbar on the left covers up a paragraph's worth of first 2-3 characters on mobile Safari.

That's why a sole proprietorship is best</joke>

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