I had the honor of being asked by the U.S. Department of State to speak to a wonderful group of young Latvians at the Start-Strong! Pre-Employment Boot Camp in Liepaja, Latvia this past July 30th. The boot camp involved more than 500 Latvian youths, and my seminar focused on effective communication. The attendees were a great group and I really hope they found the experience as enlightening as I did.
The LLC/Corp question seemed like it was pretty settled about two years ago in favor of corporations, but I recently have had multiple clients make inquiries about which to be and why. For clients who are anticipating having third party investors, employee option pools, etc. I still think the corporate formation is the way to go in the vast majority of situations.
As a starting point, we can do everything with an LLC that we can do with a corporation – this is due to an LLC at its heart being a contractual arrangement. While there are some things we can do with an LLC that we cannot do as simply with corporations (for instance, divorcing economic interests from control at the equity level), while the flexibility of LLCs are part of their allure, it also makes it much more complicated to mimic aspects of the corporate form with an LLC than to just use a stock corporation. For instance, it takes a lot more paper to create employee options plans, vesting arrangements, different tranches of equity, etc. with an LLC than it does with a corporation. This doesn’t even get into the practical reality of your employees being incentivized by receiving “options,” while receiving “phantom membership unit appreciation rights” does not have the same cache. If a business were to try and do a raise and keep the LLC form, that transaction could end up being much more complicated. Moreover, while it is relatively simple to convert a Delaware LLC into a Delaware corp, it is not without cost. Converting a New York LLC to a Delaware Corp, however, requires a full form merger that is a transaction unto itself. In either case, many of the formation documents that were in place for the LLC would have to be recreated to address the new corporate form. Put simply, initial legal costs would increase, as would the cost for any future transaction. As for the tax benefits of LLC’s, with limited exceptions they are duplicated by corporation making an S election.
Regarding investors, I can not imagine ever being in a situation where someone was asked why they were using the corporate form and not an LLC. Ownership of an LLC can greatly complicate investor’s personal taxation because it is a pass through entity (for this same reason, you should expect that when a Company gets investors it would need to transition from an S Corp to a C Corp, but that is a very simple process) – put simply, owners of pass through entities can be taxed on their proportion of profits even if no money is distributed to them. Even removing the complication factor, many VC funds are barred from investing in LLCs because they have tax-exempt partners who would lose that tax-exempt status if they received active business income. Finally, because these profits are K-1 income, it could also open investors to being liable for state income taxes in states where they otherwise would not have to file.
I was recently quoted by readwrite.com:
Not all accelerators are created equal. With the growth of the entrepreneurial space has come a similar pop in the programs available for startups. Some are worth their weight in gold, while others are just looking to churn and burn their clients. Do your diligence before signing on – it is easy to find current and past startups of any accelerator who can give you real insight into what you are signing up for and whether the price is right.
A recent post I did was distributed by 21times.org, a website focused on helping developers build their businesses. The full article is available here, with a snippet below.
In my practice representing successful entrepreneurs, I have noticed they share a trait which may come as a surprise to those who believe bootstrapping means doing everything themselves — these entrepreneurs know what they don’t know. They know their limitations, their strengths and their weaknesses, and know that there are times when spending the money on a professional to get the work they need done quickly and correctly is worth avoiding the headache of spending hours attempting to do it themselves, not to mention the peace of mind of knowing it was done right. If you are serious about running your own successful business, there are three types of professionals who it is time to start shopping for.