I recently met with a lawyer to discuss LLC versus S-Corp and CA versus DE. The biggest determinant for us to go with S-Corp was our aim to pick up VC funding at some point in near future. From what I have read and what the lawyer said, I understand the following:
1) VCs will want a C-Corp so some transition will have to occur. (YC member Shooter described his experience that LLCs can pick up VC funding. I don't doubt that, but we would rather remove any corporate structure issue for VCs.)
2) Tranferring from LLCs to C-Corp can be done, but it's messy. It sounds similar to a merger where the vestigal LLC is dropped down as a subsidiary. There will be more due diligence necessary to show that nothing is wrong. I did not get the impression that "any amateurish decision that you might have made in the past is now completely in the past," but would like to hear more about the LLC to C-Corp transition. In the case of S-Corps, both S and C-Corps are corporations that just differ in tax treatment, hence the ease at moving between the two. If you take on foreign or corporate shareholders, you can no longer be an S-Corp and I believe your tax treatment will change at that point of time.
VCs also prefer DE over CA. Our lawyer thought one reason they preferred DE over CA because CA laws tend to stick up for the minority shareholders, which founders eventually become after dilution. In his experience, only one VC required redomestication of the C-Corp from CA to DE.
One thing to consider is possible legal action against you. If you are a DE corporation and some big company wants to make your life miserable, you'll be appearing in a DE court. Our biggest competitors will probably be NY-based, so we believe there's some advantage to a CA incorporation. (Let the Gubernator protect us little CA guys from the non-CA competitors.)
If you are a CA-based company that incorporates in DE, you'll have a little more paperwork and you'll still have to pay all the CA fees.
I didn't know LLCs could file tax returns as S-Corps. By "nominal stipend," I presume Denny means at least the low range of salary standards. I've read the IRS will reject attempts to low-ball salary to inflate dividends and escape self-employment.
Comments
I recently met with a lawyer to discuss LLC versus S-Corp and CA versus DE. The biggest determinant for us to go with S-Corp was our aim to pick up VC funding at some point in near future. From what I have read and what the lawyer said, I understand the following:
1) VCs will want a C-Corp so some transition will have to occur. (YC member Shooter described his experience that LLCs can pick up VC funding. I don't doubt that, but we would rather remove any corporate structure issue for VCs.)
2) Tranferring from LLCs to C-Corp can be done, but it's messy. It sounds similar to a merger where the vestigal LLC is dropped down as a subsidiary. There will be more due diligence necessary to show that nothing is wrong. I did not get the impression that "any amateurish decision that you might have made in the past is now completely in the past," but would like to hear more about the LLC to C-Corp transition. In the case of S-Corps, both S and C-Corps are corporations that just differ in tax treatment, hence the ease at moving between the two. If you take on foreign or corporate shareholders, you can no longer be an S-Corp and I believe your tax treatment will change at that point of time.
VCs also prefer DE over CA. Our lawyer thought one reason they preferred DE over CA because CA laws tend to stick up for the minority shareholders, which founders eventually become after dilution. In his experience, only one VC required redomestication of the C-Corp from CA to DE.
One thing to consider is possible legal action against you. If you are a DE corporation and some big company wants to make your life miserable, you'll be appearing in a DE court. Our biggest competitors will probably be NY-based, so we believe there's some advantage to a CA incorporation. (Let the Gubernator protect us little CA guys from the non-CA competitors.)
If you are a CA-based company that incorporates in DE, you'll have a little more paperwork and you'll still have to pay all the CA fees.
I didn't know LLCs could file tax returns as S-Corps. By "nominal stipend," I presume Denny means at least the low range of salary standards. I've read the IRS will reject attempts to low-ball salary to inflate dividends and escape self-employment.