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LLC vs. C corp for early stage company

My co-founder and I in the process of launching a new company and were wondering should we form as a LLC or C corp with the sub chapter S and whenif we want to take outside funding we can revoke sub chapter S. Speaking with few funded companies their recommendation was just form a C Corp in the Delaware. Speaking with one of the attorney it sound like its bit expensive to setup corporation in the state of Delaware

What would be your recommendation for a very early stage company? I want to make sure it's cost effective and not gonna cost logisticallegal challanges plus allows us to get board of advisers and funding if we choose to

Thanks in advance

-Meetul.

21 Replies

Michael Barnathan
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Michael Barnathan Entrepreneur • Advisor
Co-Founder of The Mountaintop Program, Google Alum
There's no one-size-fits-all answer to this, but I've personally found it much easier from a tax and process standpoint to start the company as an LLC until it starts to acquire external shareholders (at which point you can transition it to a C corp).
Michael M
1
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Michael M Entrepreneur
Never Stop Creating!
LLC from the initial will absolutely simplify the process from a tax basis and in getting off the ground and isolate you and your partners from any initial legal backlash as long as regulatory guidelines are followed.

Most , I wont say all, but I personally have never met an investor outside of personal investors who would touch anything investment wise for an LLC. Most will make you convert and transition, for obvious financial reasons as Michael B. Stated.

As for operating out of Delaware or any of the other "popular" business law friendly states its always initially cheaper but for example some states still require you to obtain a foreign entity filing to operate a business in your state that is registered in another, so the cost savings become negligible.

Not a lawyer, just some personal experiences I have had.
Jason Wang
1
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Jason Wang Entrepreneur
Founder & CEO at TrueVault. A HIPAA Compliant Secure API to Store Health Data.
Clerky.com (a Y Combinator company) can help your setup your C-Corp in Delaware for $99 and provide you with post-incorporation documentations for $299.

Most (if not all) YC companies use Clerky to setup their C-Corp now.
Dave Sifry
1
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Dave Sifry Entrepreneur • Advisor
Head of Product at Addapp Corp
If you are serious about taking outside funding as part of your plan, go directly for a C corp in Delaware, and file to do business in California. You'll pay more ufront, but it will save you oodles of time and expense redoing things later. Dave
Mike Moyer
0
0
Mike Moyer Entrepreneur • Advisor
Managing Director at Lake Shark Ventures, LLC
LLC. Easy to covert to C, fewer hassles over all. Easy to implement dynamic equity splits so everyone gets the right slice. Mike WWW.slicingpie.com
Chris Murphy
0
0
Chris Murphy Entrepreneur • Advisor
Director of Corporate and Legal Affairs at E2open
I agree with Jason. Yes you will have to convert almost always for funding, and that will cost you $2k+ usually. Just use clerky and be done with it for the same as an LLC.
Michael Brill
0
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Michael Brill Entrepreneur
Technology startup exec focused on AI-driven products
Anything you might potentially save with an LLC or S-Corp will be vastly outweighed by the time you spend monkeying around with learning multiple processes and filing paperwork. Jason's suggestion (Clerky) sounds like the way to go... actually, I've been fretting about whether to take an existing C-Corp and repurpose it for my new startup or just create a new one. I now know the answer... thanks Jason!
ROBERT H LEE
0
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ROBERT H LEE Entrepreneur
Research Fellow in Law, Science & Technology @Stanford University
LLC is easier and a bit cheaper, but most investors will insist on DE C Corp. A great solo attorney for this is Derek Yu: http://www.corporateestatelaw.com/ Regards, Robert Lee Startup Consultant & Investor at SV Accelerator: SVaccel.com Entrepreneur-in-Residence at Stanford: codeX.stanford.edu ? of Technology & Adventure: facebook.com/HolokaiAdventure @goldspruce, linkedin.com/in/robertlee1 +[removed to protect privacy] - California
Mark Jacobstein
0
0
Mark Jacobstein Entrepreneur • Advisor
Chief User Engagement Officer at Guardant Health
Delaware C-corp if you plan on succeeding. Play to win. :) And clerky.com looks like a good answer.
Amy Kadomatsu
0
0
Amy Kadomatsu Entrepreneur
Co-Founder & President, ROKO Labs (I'm hiring!)
Meetul, happy to take this offline as well, but wanted to respond to your question. i'm no lawyer but have had first hand experience and wanted to chime in. i would suggest - it may be a bit more expensive to do a c corp vs an LLC, but it seems to be much more efficient to start as a c corp from the outset, and i would argue that it's not just about outside funding. it's also whether or not you want to give equity to employees. and how, if at all, you'd end up signing contracts with clients and/or subscribers. In the case of employees.... if you want to give a standard equity option package, a c corp is so much easier....lots of qualified legal folks who can help you here, and the basic agreements are well understood. the tax implications for you / employees etc are all well documented. i'm going through trying to create a phantom plan for an LLC right now and it's difficult to even find the right people to create the plan in a cost-effective way. plus there are implications for a phantom stock plan that are different than a c-corp. and while they may net out the same, it is still a hurdle to have to explain all of that to employees. in the case of contracts.... the one issue here i would highlight is one of assignment. if you have the power in your negotiations to have the agreements be auto-assigned to an acquiror or a follow on entity, then this may not be a problem - if you change the structure in the future, it can be subsumed by the new entity w/o much of a problem. but if you may not have the power in negotiations and each assignment requires approval by the client / subscriber / etc, then that means that if you change the structure, you'd also have to do a manual approval process with each of those underlying contracts (which is a big pain point when you have a million things on your to do list). in the case of funding... i think you've already heard the feedback. another thing to consider is that i've seen companies lose interest from potential angels because they took too much time catching up with paperwork to get the investment done. that's no fun for anyone. and lastly....switching later will _never_ be at the top of your priority list (none of this is fun). so if you can avoid it, don't plan on doing this twice. again - just my take on things and there are TONS of companies for which an LLC structure makes sense. i'm just not sure i would recommend it for you. good luck! amy
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