Cheap generic Alprazolam, It seems like every year I see more and more companies that are trying to raise money and are structured as LLCs. It feels like lawyers across the country are recommending an LLC structure for early stage startups, ordering Alprazolam online without prescription. Rabatt kaufen Alprazolam, But they're not asking one important question: "Are you planning on raising professional investment?"
If there were, then there would be more companies avoiding the LLC structure and setting things up as Delaware S corporations that eventually drop their S elections and become C corps, North Dakota ND . Cheap Alprazolam tablets, If you are serious about raising money, my advice is usually not to set up an LLC, cheap generic Alprazolam. Kjøpe Alprazolam online, Set up a Delaware S or C corp.
Of course anything can be fixed, so it's far from fatal if you do set up an LLC, cheap generic Alprazolam. You can set up a C corp and have it buy the assets of the LLC, Delaware DE Del. . Buy Alprazolam from canada, It just costs money and time. You end up with less money and the lawyers end up with more, cheap Alprazolam online without prescription. Cheap Alprazolam, Occasionally, angels will invest in LLCs, buy Alprazolam online, Buy Alprazolam overnight delivery, but it's basically unheard of for VCs. TechStars Cheap generic Alprazolam, is an interesting case - we greatly prefer to invest in S or C corporations, but we'll also invest in LLCs only because it's not practical to pay to dump the LLC and incorporate the company at a very early stage. But man, Texas TX Tex. , Illinois IL Ill. , can it be a headache. Those LLCs all have to provide K-1s to their investors, cheap Alprazolam no rx. Köpa Alprazolam, This ends up happening at the last minute and delaying personal tax returns for those investors. This sounds like a small problem, köpa rabatterade Alprazolam, Ordering Alprazolam from canada, but investors who play with LLCs end up spending a bunch of extra time running around at tax time. I'm particularly sensitive to it right now because it's that time of year, cheap generic Alprazolam. There are other reasons investors don't like LLCs too, bestill Alprazolam online. Köpa Alprazolam online, One big example is that they may end up creating tax bills before generating any liquidity.
Bottom line: Assuming you're not ready for a C corp, Indiana IN Ind. , Cheapest Alprazolam in the world, create your decision tree based on whether or not you feel that raising professional investment is desired/likely. If so, cheap Alprazolam online, Alprazolam discount, consider a Delaware S corp for now. Cheap generic Alprazolam, This is very easy to change to a C corp. If you don't plan to raise money, comprar Alprazolam baratos, you can get away with an LLC and it may have very real tax advantages for you to do so. As always, consult your (ideally, venture experienced) accountant and/or legal counsel before taking any specific advice, especially from me.
As for why I'm suggesting Delaware, that's for another post.
UPDATE: I posted More on LLCs two days later as a follow up.
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I've never personally set up any of these, however I was talking to a friend the other day and he was talking about avoiding S Corp and LLC and going towards some kind of estate something or the other (sorry can't remember exactly what it was). Basically, it creates a "shell" company out of a company. It's designed to protect the company in the event of a lawsuit, divorce, etc. Do you know anything about this?
sounds pretty fishy. it could be a special situation, and there are plenty.
Quite frankly, I don't understand investor resistance to the LLC structure which has significant tax advantages on certain types of businesses; for a startup, those tax advantages can translate to positive cash flow, never a bad thing. It seems to me that professional investors insist on corporate structures from the standpoint of consistency and clarity of ownership. I don't think that LLCs should be dismissed out of hand nor do I think that professional investors should insist on incorporation without some dialogue on the matter.
They shouldn't be dismissed out of hand, you're right. That's why I said you should consult your accountant/attorney. I'd like to learn more (which is why I blog). What sorts of businesses do you normally recommend set up an LLC?
Let your accountant be your guide on that one. My takeway from a discussion with another CEO is that if you business expects high margin transactions of 50% on your product / service, then the LLC structure saves big on taxes. Two business "types" that come to mind are subscription services and car washes.
In my experience — the key to this question is whether the start-up expects/wants to raise VC.
To make a VC investment in an LLC requires an entirely new set of forms developed from scratch. The classic rights, preferences and privileges of a VC preferred stock investment do not translate easily or comfortably into the LLC format (although, admittedly it can be done). Developing these scratch documents is a costly endeavor (and obtaining venture capital is not cheap anyway) — it is unlikely at best that a VC will want to bear these additional costs.
Also, an LLC is not able to issue stock options to its employees with the same tax advantages as a corporation. And the manners of obtaining liquidity in an LLC (through distributions or liquidation) do not translate easily into the VC world and have potentially different tax treatment. For example, the flow-through tax treatment of an LLC could potentially cause problems for the limited partners of the VC. Finally, and perhaps most importantly, it is not possible to do an IPO with an LLC. Any LLC that wanted to go public would be required to first convert to a corporation anyway with potentially very adverse tax consequences.
This is not to say that an LLC is not an excellent choice for joint ventures or small businesses which will never need to raise money from a VC. LLCs are very flexible entities that can provide favorable tax treatment for individual investors. It is just exceptionally rare to find a VC that is willing to invest in an LLC.
One last thing, S Corps are prohibited from having shareholders that are not natural persons (or certain trusts) so an S Corp could never take institutional money. Also, I have seen people experience real pain (as in tax pain) when converting from an S to a C — all in all it is a tricky question that bears some real thought before answering — need to tailor the answer to the recipient.
I did a blog post on this in more detail a little bit ago here – http://dividendsandpreferences.blogspot.com/2009/...
Not in most cases. I'll post a follow up post soon about the double taxation myth and the myriad other drawbacks to an LLC.
If a company hopes to make any real money (that will be distributed to the members) isnt an LLC the best choice to avoid double taxation?
Also, I am not an accountant, but if a a number of people create a C corp and incur a ton of expenses trying to create a product prior to getting VC they wont be able to pass through those expenses to themselves. They remain stuck in the original corp. I ran into that once before when I created my first corp while trying to get something going back 10 years ago.
Hank, are you sure about the IPO rules? I don't believe that Blackstone Group converted; E*Trade and Seagate remain LLCs. It may be more difficult to do an IPO as an LLC, but I don't believe it's not possible.
With all the scrutiny of the last few years on options, I have to think that they've lost their attractiveness, and I hear of companies that are now using restricted stock as bonuses.
One attractive aspect of the LLC structure is that companies have more flexibility in how they claim income to the IRS and in that case, they can avoid higher taxation on certain types of income such as capital gains.
While there is a lot of ink about how much VCs dislike LLCs, I think the more interesting story is on companies that remained LLCs despite VC pressure. Segway, LLC was financed by Kleiner Perkins, and I'm sure there are others.
I'm very anti S-Corps in the early stage, since it prevents the company from having anyone as a shareholder who is not a "natural person". I'd estimate that more than half of the angel investors I know invest through some kind of entity (typically an LLC), thus you immediately force a conversion from S-Corp to C-Corp in an angel round, which adds a ton of overhead and expense. Starting as an LLC, you can convert at the time of institutional investment much more easily, and you'll have the capital to support the legal fees…
Huh? Going for s to c is a simple change. Going from LLC to c is a total reorg!
Pingback by More on LLCs | Colorado Startups — March 29, 2009 @ 7:05 pm
[...] days ago, I lamented about how much of a pain LLCs can be for investors. The comments were [...]
Sorry I was referring to operating overhead and expense. C-corps require an added level of reporting, taxation and structural administration that can be PITA in a seed stage company. I agree that LLC to C is more of a reorg than S to C, but what I'm suggesting makes the timing appropriate to the stage of the company.
gotcha – see my follow up post today
Jennifer — I appreciate your questions. You are exactly right that there is no federal or SRO prohibition on doing an initial public offering as an LLC. You are also correct in noting that some LLCs are publicly traded, OchZiff is another. However, LLCs are creatures of state laws and there are multiple states that do not allow free exchange of LLC interests which would make an IPO impossible without first converting to a different entity/state.
Even if you formed your LLC in a state that has an IPO friendly set of statutes, in my experience you would still have a practical near impossibility because of the underwriters. It is hard enough to get underwriters interested in a start-up IPO, it would take an extraordinarily exceptional circumstance to convince them to underwrite anything non-standard, e.g. an LLC.
I guess my final thought is, why ratchet up your level of difficulty as a start-up? If you know you are creating a company that will need VC and that hopes someday to IPO, why not take the structural path of least resistance? (Again, this is not to say that LLCs are not VERY useful in many other circumstances.)
As for restricted stock v. options, the usual drawback to doing restricted stock in a start-up is that the recipient may have to pay taxes on grant (if an 83b election is made) or on vesting. Either way, the stock is not typically liquid in a start-up (so you can't sell it to pay the taxes) and most founders/start-up employees are in cash conservation mode. — Hank
I know there is the issue of "C" corps being double taxed on retained earnings (if they take those earnings out as profit later). On the other hand, the ability to retain earnings is what kept my "C" corp alive last year. We had enough cash stored up that we could weather a downturn in the economy and still be cash positive by the end of the year. That's something that becomes much more difficult if you must push all the profit out to your shareholders each year. Retaining earnings is what allows a company to weather not only the upturn growth but the downturn economy without risking personal funds to do so. With the new stimulus allowing us to write down losses this year against past profitable years, that only increases the value of having those earnings around to keep your cash rich position during hard times. Run in the black – it only makes sense
Remember – Cash is King!
LLC's and S corps are not required to distribute profits. However, members/shareholders are required to pay taxes on profits regardless of whether they were distributed or not. My take: distribute 40% to cover taxes, keep 60% in company until you've got a nice cushion.
But isn't there a significant difference in the tax rates between LLC/S and C? Aren't the C corps taxed at capital gains rates, and the LLCs and S's at the owner's income tax rate (regardless of if they leave in the company or not). I'm not an accountant (can you tell) but this was how it was explained to me 12 years ago when I formed my company
Cheers,
Lee