LLC vs. S Corp — Incorporating Your Startup
Which entity is best for a start-up?
First, let’s define each type of entity and how they can be formed. Then we will discuss which is best.
An LLC (Limited Liability Company) is a hybrid of a partnership and Corporation. Instead of “Shareholders”, owners are referred to as “Members”. In a corporation there are officers that run the company, such as President, Treasurer, Secretary. With an LLC there are no officers, instead they are referred to as “Managers”.
An LLC also has different documentation than a Corporation. Instead of Articles of Incorporation, an LLC has Articles of Organization. Instead of Stock Certificates in a Corporation, the LLC has Membership Certificates.
Starting Your Own Business
by Martin Vivek
Starting your own business is exciting. Putting your dream in action, ideas down on paper and out for the world to see can be challenging. Becoming an entrepreneur can hold some difficulties. You must be prepared for hard work, planning every aspect of the business and how it will become profitable, meticulous organization, and strong dedication. To become a successful entrepreneur you need to possess certain skills, to be independent, creative and more than willing to take risks in order to see the rewards of your business. Many entrepreneurs who have found success in starting their own businesses have a strong support system and business mentors that will help provide them with insight and guide them along the road to success.
Best Advice on Starting a Business
Best Advice on Starting a Business – Entrepreneurs from The Lean StartupConference relay the best advice others gave them when they first set out to start a business.
This video and article was produced by David Spark, who was reporting for the New Relic Blog (http://blog.newrelic.com) at The Lean Startup Conference in San Francisco.
500 Startups: Blowing up Startups with Design, Data & Distribution
Today, as part of incubator roundup, we’re featuring Dave McClure’s 500 Startups.
If you haven’t heard of it already, 500 Startups provides early-stage companies with funding ranging from $10K to $250K via seed investments. They offer a startup accelerator program and new micro-fund models, like the Twilio Fund. With over 160 experienced startup mentors around the world, a cool creative workspace in the heart of Silicon Valley, and a vibrant community of startup founders, we think 500 Startups is a winner!
Here’s a bit about their philosophy:
Are there any laws I need to follow when issuing stock to founders in different states?
Naomi Kokubo
Question: One of our founders asked us, “We’re starting the company with founders residing in more than one state. Are there any laws that we should be aware of?”
Answer by Naomi Kokubo, Editor of Founders Space
I’m a big fan of Startup Law 101 series: http://www.grellas.com/faq_business_startup.html
You need to look at the securities law surrounding the founder’s stock purchase and what is known as “blue sky” laws:
http://www.grellas.com/faq_business_startup_012.html
My take away from reading this webpage is: the key securities law concern for any stock issuance by an early-stage startup is to make sure that the offering fits within an exemption to the registration requirements.
Don’t Have an Idea for Your Startup? Try This…
Are you having trouble coming up with a great idea for your startup? Well, try these four sites, and you’ll get a good laugh. You may even recognize some of the ideas!
What are the advantages & disadvantages of incorporating in Delaware?
Naomi Kokubo
Question: What are the advantages and disadvantages of incorporating in Delaware? I hear it’s important for an IPO, but if we don’t plan on going public anytime soon, should I bother to incorporate in Delaware?
Answer by Naomi Kokubo, Editor of Founders Space
That’s a really good question. We did some research and we found an interesting article on the advantages and disadvantages of incorporating in Delaware.
What’s the best way to bring on a partner?
Ethan Stone
by Ethan Stone, Stone Business Law
First, a quick but important clarification: I’m not your lawyer and this answer doesn’t establish an lawyer-client relationship. I’m giving a generic answer to a generic question to educate the users of this site.
Second, a warning. I’m going to sketch out some of the key issues to consider. As you’ll see, however, this is not a simple question. The answers depend a lot on your specific situation and preferences. Moreover, getting this wrong can cause huge problems down the line. Mistakes in this area regularly destroy otherwise successful businesses. Accordingly, you should not try to do this yourself if at all possible. You need an experienced lawyer who can help you think through your particular issues and come up with a solution that it going to work for you.
Perfecting Your Investor Pitch
Bill Reichert
by Bill Reichert at Garage Technology Ventures
Endless articles, books, and blogs have been written on the topic of business plan presentations and pitching to investors. In spite of this wealth of advice, almost every entrepreneur gets it wrong. Why? Because most guides to pitching your company miss the central point: The purpose of your pitch is to sell, not to teach. Your job is to excite, not to educate.
Where can I find a stock plan & equity compensation documents?
Dan Walter
Dan Walter, CEO of Performensation
This video is a fun way to learn about stock option plans and equity compensation.
ADDITIONAL ANSWER:
Below is a link to the Equity Compensation Documents provided by Orrick. These are a good starting point, but we still highly recommend that you speak with your attorney and go over these documents together.
Go see Equity Compensation Docs
Stock Plan
Many companies use employee stock options to compensate, retain, and attract employees. The Stock Plan is the general governing document containing the standard terms and conditions of the options to be granted. This document represents the standard provisions for a Silicon Valley start-up company.
Do you have any templates for employment and consulting agreements?
Naomi Kokubo
by Naomi Kokubo, Editor of Founders Space
Below is a link to the Employment & Consultant Documents provided by Orrick. Keep in mind, these do not replace having a good attorney, but they do provide a good starting point.
Go see Employment & Consultant Docs
Employee Offer Letter
What is Class F Stock (or Founders Stock)?
Naomi Kokubo
by Naomi Kokubo, Editor of Founders Space
Class F stock was invented by The Founder Institute and Yokum Taku (a Silicon Valley lawyer) to help protect founders. Typically, when a startup receives venture funding, the founders wind up with Common Class shares, while the investors get Preferred Class shares. So what is Class F stock? Class F stock gives founders some added benefits, including 10 votes per share, some protective rights similar to those of preferred stockholders, and the right to elect a director that has two votes on the Board.
How do I deal with out-of-state and overseas partners?
by Geraldine Zaroukian, Managing Director of Zarig.com
QUESTION:
1. Should I do a partnership or LLC with my partner in Florida and give shares to my partner in Portugal? Or can I give them both ownership in the company?
2. Do I need to have a Florida State Business License along with a Kansas License too — especially if my Florida partner picks up some business?
ANSWER:
Is an LLC or a Corporation better when starting a new services business?
Naomi Kokubo
by Naomi Kokubo, Editor of Founders Space
I found a couple of interesting articles that might help answer this question. One from Wikipedia on S Corporation, and here’s an excerpt:
S-corporations pay a franchise tax of 1.5% of net income in the state of California (minimum $800). This is one factor to be taken into consideration when choosing between a limited liability company and an S-corporation in California. On highly profitable enterprises, the LLC franchise tax fees, which are based on gross revenues (minimum $800), may be lower than the 1.5% net income tax. Conversely, on high gross revenue, low profit-margin businesses, the LLC franchise tax fees may exceed the S corp net income tax.
What are the tax implications in California between an LLC and a Corporation?
Naomi Kokubo
by Naomi Kokubo, Editor of Founders Space
It’s probably best to understand the difference between LLC, S Corporation and C Corporation first before we can sort out the tax implications between LLC and Corporation.
There are two legal business entities that relate to this question. One is LLC (limited liability company) and the other is C Corporation (traditional corporation). S Corporation is an election by limited liability companies or traditional corporations to be taxed as such. In other words, both limited liability companies and traditional corporations can choose to be taxed as S Corporation.
Startup Company Forms
Richard Hsu
by Richard Hsu at One Page Blog
My former Venture Law Group colleague and Harvard Law School graduate, Jeff Thomas, has been teaching entrepreneurship courses in various law and business programs. He formed his own company CrazyBrains LLC with the goal of helping entrepreneurs by open sourcing startup corporate forms. Here is his nicely put together one-pager.
Click here for downloadable PDF: Startup Company Forms
Click here to read more from Richard Hsu.
How do I set up a virtual company in Vermont?
Naomi Kokubo
by Naomi Kokubo, Editor of Founders Space
Okay, this is a great question and very intriguing. I did some research, and here’s what I found:
This site walks you through the basics of Vermont Virtual Companies:
http://vermontvirtual.org/Main_Page
Is a ‘Virtual Company’ Worth the Effort?
http://www.law.com/jsp/lawtechnologynews/PubArticleLTN.jsp?id=1202448133306
Here’s a book the covers Virtual Company Formation:
http://bit.ly/bkt6De
My recommendation is to get a Vermont-based lawyer to walk you through the process. First of all, this might not be the right business entity for your business, especially if you aren’t operating out of Vermont. It may just wind up being more of a hassle than any “virtual” benefits you receive.
Where can I find director and officer related documents, including indemnification agreements?
QUESTION:
Where can I find director and officer related documents, including indemnification agreements?
ANSWER:
Naomi Kokubo
by Naomi Kokubo editor of Founders Space
Below is a link to the Director and Officer Related Documents provided by Orrick. Keep in mind, these do not replace having a good attorney, but they do provide a good starting point.
Go see Director & Officer Related Docs
Indemnification Agreement
Indemnification agreements are often provided to a Company’s directors and officers to minimize potential personal liability for actions taken in their capacity as directors and officers.
Stockholder Approval of Indemnification Agreement
Can I Convert a C Corporation to an LLC?
Ethan Stone
by Ethan Stone, Stone Business Law
QUESTION:
I converted my startup from a California LLC to a C Corp. Our business had changed over the past year and I’d like to convert it back. Is this possible?
ANSWER:
First, a quick but important clarification: I’m not your lawyer and this answer doesn’t establish a lawyer-client relationship. I’m giving a generic answer to a generic question to educate the users of this site. The information below is general in nature and should not be understood as a substitute for personal legal advice.
How does an Indian citizen and resident form a company in the U.S.?
Ethan Stone
by Ethan Stone, Stone Business Law
QUESTION:
I am currently a citizen of India, and I live in in India. However, I’d like to incorporate my new startup in US. How do I go about this?
ANSWER:
First, a quick but important clarification: I’m not your lawyer and this answer doesn’t establish a lawyer-client relationship. I’m giving a generic answer to a generic question to educate the users of this site. The information below is general in nature and should not be understood as a substitute for personal legal advice.
Can you point me to a few examples of eco-social startups & their company formation?
QUESTION:
I wish to start up an organization with the mission of eco-social benefit.
I want to make sure that most of the proceeds go towards the mission. As founder, I want to dedicate the proceeds from my speaking and consulting work into this organization, which, in return, will fund my future engagements to help those who cannot pay for my services. I do not want personal income for the next few years. I just want to donate my services and be funded (travel, office expenses, etc) for my pro-bono work.
How much equity should I grant to a crucial programmer?
QUESTION:
I’m starting a Web service with two partners. I am Partner A and bring x to the table. Partner B brings y to the table. (The nature of x and y aren’t important for purposes of this question.) Partner C is our tech person and programmer. He’s an invaluable resource — years in the industry, past CTO of a successful internet company, etc. We’re lucky to have him aboard.
We’re going to launch this business out of our own pockets, i..e, there’ll be no compensation for anyone until sales start coming in.
Do you know of any law firms who will assist an entrepreneur without charging an arm & a leg?
QUESTION:
I’ve read all the material on forming my startup, from going with an LLC to going with a Delaware C-Corp.
The reality is, I still need help from a professional lawyer to make sure all my paperwork is in order, my structure is the correct one, and so on. I’ve read about different incubators that assist startups in legal aspects so they can focus on product.
However, I haven’t come across any law firms who have special discounts or deferred payment for startups. Do you know of any law firms who will assist an entrepreneur like me with company formation without charging an arm and a leg? Thanks!
Is it easy to switch from an LLC to a C-Corp once I’m ready for investment?
I’m planning on bootstrapping my startup for at least the first six months. However, I do plan to seek investment down the line. Is it easy to switch from an LLC to a C-Corp once I’m ready for investment? What’s the best approach?
ANSWER:
by John Frankel, Founder of ff Asset Management
John Frankel
Yes. The advantage of having an LLC is the pass through of losses that can offset other income. Thus, many companies do not make the switch until they start to rack up profits. It’s easy to switch. Note that most later stage VCs require a C Corp, but at ff Asset Management we do not.
Does it make sense to set up an LLC or S-Corp for my startup?
QUESTION:
I would like to incorporate a value-added engineering software reseller business. It would be a Pennsylvania based company of about 15-25 employees working out of their home offices (no corporate office). The business involves sales representatives and technical employees delivering on-site training, demonstrations, and technical support. Would it make more sense to set up an LLC or an S-Corp?
ANSWER:
Antone Johnson
Does my startup need to be incorporated for the terms of service to hold up?
QUESTION:
If I am launching a social networking site, do I need to incorporate it in order for the terms of service, terms & conditions, privacy policy and all that stuff to hold up?
ANSWER:
Antone Johnson
What do I need to do to legally set up an online social networking business?
QUESTION:
I’m entering the beginning stages for creating a new social networking website. It’s similar to Facebook and MySpace. What legal aspects of a traditional business would I need to make sure to handle properly (e.g, fictitious business name statement, business license, form of ownership, etc.)?
ANSWER:
Antone Johnson
by Antone Johnson at Bottom Line Law Group
Start by forming a limited liability legal entity to operate the business: either a corporation or an LLC. A corporation makes sense if you’re planning to raise capital at any point from venture capital or angel investors; it also makes it much easier to issue stock options to employees, which is an expected part of the compensation package at most tech startups.
Do I need to register as a foreign business operating in Florida?
QUESTION:
I am forming a business wherein I will do freelance software development. All I need is myself and a computer, so I can be location independent. My hometown (in Florida) is expensive when it comes to starting a business so I was going to form a LLC in Delaware instead. Do I need to register as a foreign business operating in Florida?
Florida statute 608.501 §1 states that a foreign LLC cannot conduct business within Florida until it files all the necessary paperwork, but 608.501 §2i states that conducting interstate business is not considered conducting business within Florida. Furthermore, 608.501 §2c states that foreign LLCs maintaining bank accounts in Florida does not constitute conducting business either.
Should I form a separate company around each of my websites?
QUESTION:
I want to start a network of websites all with similar names and themes to sell certain merchandise. Should I have one C-corp with all of the websites registered under it and individually trademark the sites? Or should I register each website as a different entity, even though it will be far more tedious? As far as exits go, how will I be affected if I want to sell one of the sites, but not all?
ANSWER:
Naomi Kokubo
by Naomi Kokubo, Cofounder of Founders Space
Do I need an attorney to incorporate?
QUESTION:
I will be incorporating my company in Los Angeles, CA and was interested in knowing if I would need a licensed attorney to represent my company before I submit.
ANSWER:
Naomi Kokubo
by Naomi Kokubo, Cofounder of Founders Space
Legally, you don’t need an attorney to incorporate, but unless you’ve done it many times before, it’s a good idea. You may want to have an attorney look over your documentation and make sure you are choosing the right entity for your business.
