Legal, Tax, and Accounting August 9, 2020

C-Corp or LLC for a Solo-Entrepreneur?

fusan

Is there any reason/advantage that a solo entrepreneur should consider a C-Corp v.s. a LLC? Most common reason I hear is that it is good for when you will be raising venture capital. But if none has been raised or being planned in immediate future, then what other factors should guide the decision. I am about to register my first ever company and the whole set of obligations for a C-Corp (taxes, board, meetings, payroll even for 1 employee, etc.) seem way to much to handle.

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    Setting up an LLC is recommended than setting up a sole proprietorship or dba. This is because an LLC protects you from personal liabilities on your business. This is because legally, you are separate from your LLC, which is not the case with sole proprietorship, it makes you personally liable to whatever happens to your business. You can check this: https://www.dunster.io

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    If you’re less than $1,000 MRR and flying solo I’d highly recommend setting up a DBA as a sole proprietor.

    Once your product is validated I’d hire an attorney, and get your structure setup specifically for your goals. It’s really easy to to change from a dba to a Corp or LLC.

    Also you can definitely raise money as an LLC.

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      Thank you! Wouldn't DBA open me up to personal liabilities? I guess it is a simpler way to go when just getting started but if I have a product to sell and partners to work with, wouldn't that introduce risk at a personal level?
      I know one can have investors with an LLC but from what I heard most VCs don't consider funding an LLC structured company and don't want to get involved in conversion processes. Do you know different from your experience?

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        Yes an LLC does provide you more protection than a DBA. But your chances of getting sued while less than $1k MRR is microscopic(unless you’re in gambling, marijuana, music streaming, etc..). If you were to get sued while less than $1k MRR the opposing party is going to try everything they can to “pierce the corporate veil” and try to sue you directly. Your risk as a DBA vs. an LLC in the early days is so tiny I wouldn’t worry about it.

        Your biggest risk in any business, is you and your partners not getting along. This is where you want an LLC or a Corp with a well written operating agreement! You want this operating agreement to be perfect, and written by an attorney who has deep knowledge of your specific situation. However, this is spendy! We just went through this and it was over $2k in legal fees.

        If I was starting a brand new startup I would have a handshake agreement with my partner(s) that at a certain milestone(1k-5k MRR) we meet with an attorney to create a fair operating agreement. If one of your partners tries to screw you before that milestone, your business was going to fail anyways.

        As far as fundraising goes, yes it’s very common for VCs to want an S-Corp. But converting to a Corp is actually pretty easy. If you decide you want to raise money, I’d hire an attorney or consultant to create a Corp and terms sheet. This should take less than a few weeks, so I’d knock this out as soon as you decide to raise money.

        Basically my advice boils down to the following: Yes this legal stuff is important, in fact it’s so important I’d recommend spending a lot of money on attorneys to get this done perfect. But in the early stages of a startup this money is better spent elsewhere until you have the confidence this business will 100% succeed.

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          Thanks for the detailed explanation. I think I am going to go with LLC just to avoid the hassle of doing any conversion later after getting traction but the point you made regarding focusing more on validating business and partners in early days definitely make sense.

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          Great information! I'd just add that you could draft a Founders Agreement now so that everything is clear from the start. Sample: https://start.law/Blog/9154832

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    I'm not certified into giving legal or financial advice and what I'll write below doesn't represent advice. You should consult a lawyer/CPA before making your decision.

    I went the LLC route because:

    1. I don't plan to raise money
    2. The rules are super flexible in terms of how you run it (just needs an operating agreement)
    3. Tax reporting is simple
    4. No double taxation
    5. You can still have up to 100 members (gives me flexibility in case I want to bring someone on board)
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      Yes, thank you. These are all the reasons why I want to go the LLC route as well. Do you even have to report taxes separately or just file with your own personal tax statements?

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        Yes, Schedule C. Remember to keep track of your business expenses so you can deduct them. There's some good apps for this.

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        Haven't filed any taxes yet because I just formed the LLC but my understanding is that for a Sole Proprietorship, I'd use Schedule C and include it as part of my own tax report

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