From a tax perspective, the IRS doesn't recognize the LLC as a business entity type. If you own a single-member LLC you'll be taxed as a sole-proprietor by the IRS & pay income and self-employment taxes on the net taxable income of your LLC. If your LLC has more than one member you'll be taxed as a partnership. An LLC can elect to be taxed as a corporation, either C or S.
An advantage of the S Corp is the losses will flow to your personal return. This is likely to be most beneficial in the earlier years when you're pumping money into the company. As long as you have sufficient basis in the company, the losses are deducted from your ordinary income on your personal tax return.
The taxation of LLCs vary by state too. Some states have a low franchise tax on LLCs. CA, on the other hand, has a $800 minimum tax on LLC (and corporations). The franchise tax in some states is based on gross revenues so be aware of that if you expect to have low-margin product.
Take a look at http://www.biztaxtalk.com for more on taxation of various entity types.
No VC will ever invest into LLC and converting LLC to a C-corp is a pretty involved (and expensive) process.
If you're a foreign national or have a foreign national as a co-founder, you should go with C-corp.
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A quick search came up with this: http://www.feld.com/blog/archives/2006/02/scorps_vs_llcs.htm...
So, advice to the original poster, look into these things yourself and make up your mind. Ask a lawyer or an accountant... maybe they won't charge you for this advice.
1. The audience on Hacker News is probably much more interested in 'flipping' their companies and taking VC money, in general, than most entrepreneurs. If one assumes a goal of flipping within the next 1-3 years, my (deleted) input has much less value. 2. UBTI is an issue with LLCs, as your Feld link cites. The thrust of my original post was for everyone to research what is best in their particular circumstances, but I muddied that point with my own corner case as an example. 3. I realized how great my accountants and attorneys are, and how long it took me to find them. I wouldn't advocate some of my past maneuvers unless one has a really competent advisor. Unfortunately, competent accounting and legal advisors are difficult to identify in advance...you usually identify bad advisors only after they have screwed you with their incompetence.
To the OP, I would advise that you speak with a legal professional that specializes in small business and has a tax background. Preferably one that you find via a referral from another startup in your area. Entity formation is MUCH more complicated than most articles and forum posts would suggest. There are tons of tiny details that can cost you a great deal of time/money/control down the road if you don't get started on the right foot for YOUR particular circumstances. It is well worth investing a bit more time and energy in the beginning to save future headaches. Nolo.com has some decent books on deciding the appropriate business entity for your needs, although their books should not replace a consultation with a professional.
For instance?
Everyone tends to "summarize" the benefits and downsides of various entities, without making you aware of specific things that can trip you up. This is partly because it is impossible for anyone to foresee every circumstance you may find yourself it, and partly because the laws and rules are so complex. Advisors aren't psychics. Many problems don't arise until you try to do something that is restricted or that your past actions have eliminated as an option. Unfortunately, most people will seem very confident when they dispense legal and accounting advice. It falls on you to really press everyone for details about what every option you're considering means for your future plans.
Legal and accounting advisors are not all trained well, they aren't always 100% on their game, and they may have just never encountered the circumstances you may find yourself in. Getting an advisor can be like getting a shitty, know-it-all doctor that you trust initially, only to realize he's a quack. There are pedigreed duds in every profession. You have to do your own research and make your own decisions, based on what is best for you. When you work with an advisor, you should make sure they understand where you are now, where you want to be, and how you plan to get there. That will help them think of potential issues you need to be aware of. You should ask, "And the tax consequences? The liability and asset protection consequences? The future consequences of this decision on my end goal?" for every decision you are about to undertake.
That all said, below is a braindump of some of the issues that I've encountered that you should be aware of (most are interwingled, the list is incomplete, and they're in no particular order - it's a true braindump):
-Asset sales vs. stock/entity sales. Tax consequences.
-Locus issues. Effects on taxes, asset protection, securities transactions, etc. The billion or so STATE specific issues (franchise taxes, transaction restrictions, securities laws, IRC Sec. 338(h)(10) treatment, etc.) Local/municipal tax issues. I once had a company sale almost fall through because of a tiny local tax issue that came up during the buyer's due diligence. It cost me over $12K in legal fees to correct so the sale could go through, but it would have all been moot if I'd known to file a $15 form with my local tax authority. My local advisor knew about the issue, but forgot to mention it because he ASSUMED I knew about it.
-Mixed-bowl provisions
-Double taxation. Subpart F.
-Benefits and downsides of multiple entity strategies
-Taxation and deductibility of fringe benefits/compensation
-Employment/Unemployment benefits and options
-Allocations of income, debt, assets, losses. Tax treatment of each is a huge issue. Every choice has future consequences. Every choice has restrictions.
-Equity and debt financing structure benefits/downsides.
-UBTI
-Ability to retain earnings for future operations.
-Dividend payments, entity termination, and minority rights.
-Income tax effect of entity losses and profits.
-Tax and ownership consequences of initial contributions
-RULPA. Specifically, charging orders and the very different ways the various entities can handle them, which are usually not explained accurately or at all by company formation services (or average consultants.) Note that LLCs and LPs have strong advantages. Alter Ego and Reverse Alter Ego, etc.
-Drafting of shareholder/member agreements and future options and rights. This is a HUGE issue of importance, where problems will not usually become apparent until you need to sell all or part of your company or there is another 'event.'
-Loan provisions (Ex: back-to-back loans and the IRS letter rulings that can force you to give up part of your S-Corp.)
-'Series LLCs' and their very unique benefits and their potential, but untested, downsides.
-Line of demarcation, for purposes of qualifying under the estate tax payment deferral rule.
-Section 1361
-Downsides of S-Corps vs. LLCs: shareholder basis and secured lending/entity level debt, special allocations flexibility, etc.
-Payroll tax differences between the various entities (S-Corps have a slight advantage sometimes.)
-Restrictive tax and ownership rules of S-Corps.
-Issues that can occur if you have foreign owners or investors (either initially or outside of your control due to death, bankruptcy or sale.)
ETC. ETC. ETC. ETC. ETC. ETC.
However, most VCs won't fund an LLC for a number of legal reasons. If your LLC is planning to pitch to VCs, I'd recommend incorporating (into a C-corporation) before doing so. Sure, it will cost you a few thousand dollars in legal fees and paper work, but I don't know of any VCs that don't require incorporation first.
Also, I'd recommend incorporating in Delaware, since Delaware law is extremely forgiving to new startups. There's a reason why so many businesses are registered in that state...although, many startups have been incorporating in California recently as well.
You need to be a C-corp to raise money from a venture capitalist.
Do it in Delaware or make sure your home state doesn't have an enormous franchise fee.