Young startup incorporation: LLC vs S Corp vs C Corp?

June 3rd, 2015

I am looking for guidance on incorporating a 1-2 person start-up in its infancy.

I'm outsourcing a good portion of the development of my app. I'm reaching the point where I need to incorporate. I'm weighing the benefits of LLC, S Corp and C Corp. I understand that to get funding from a VC you will likely need to be a C corp. However, while I would eventually like to get funding, at this point I am spending a fair amount on the development of the app. LLC and S Corp's provide the benefit of a pass through entity that would reduce my taxable income in a meaningful way.

With that said, do you recommend forming an LLC or S Corp and then converting to a C Corp down the line? I am told it can be easier to transition from an S Corp to C Corp than from LLC to C Corp.

Any insights are much appreciated.

Thank you!

Doug Bend Legal Counsel For Entrepreneurs @DougBend • Real Estate Broker @BLGProperties

June 3rd, 2015

Hi Kurt,

I thought you might this article I co-wrote on the topic that was published in Forbes helpful.

Please feel free to give me a call at (415) 633-6841 if you'd like to chat your particular circumstances through.

Thanks,

Doug

Michael Brill Technology startup exec focused on AI-driven products

June 3rd, 2015

Hi Kurt. This topic is covered really, really well in past threads. Please do a search and you'll find great discussions on this.

Eleanor Carman Incoming BLP Sales Associate at LinkedIn

June 3rd, 2015

Hey Kurt, Michael is right - we do have lots of great discussions on this topic. Here is one in particular that I thought might be helpful to you >> http://members.founderdating.com/discuss/2097/What-kind-of-incorporation-is-best-for-a-3-fouder-start-up

Chris Carruth VP/Director. Strategy | Business Development | Operations | Product | Solutions

June 3rd, 2015

And...the concept of getting pass through losses is technically correct for LP, LLC and S corps. However, the IRS made it very difficult to actually realize it due to laws around what they term "startup costs". These costs are, by law, amortized for am incredibly long time, and at least in my experience, the majority of costs everyone has until the product is launched falls in this category. So while you/your partners may have spent a boatload of money trying to get your puppy of the ground, the pass through benefit is a whole different story. A tax accountant/lawyer can tell you what falls in this category and what doesn't. My counsel is to have them push the envelope as much as possible so you get at least some pass through loss for your personal return. The other thing to know is once the categories are set in place and the costs amortized versus expensed the returns following must also follow the same approach. Hence the need to push the limits as much as the law allows..and for which your accountant finds.

Amortization of startup cost is so negatively impactful that I have one project where the only near term loss the partners can access is to close the company down and claim all losses. Thank you IRS...

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