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C-Corp vs LLC pros and cons for b2c subscription business

First-time entrepreneur and it's finally time to launch an MVP I have been working on for the past year.

I have been doing a lot of research on the what the best route to go in terms of registering an LLC and C-Corp and I'm still unsure of which direction to go.

The product is a b2c subscription business with a heavy focus on several international markets.

I might bring one an angel investor (family) in the beginning and possibly search for additional external funding depending on the traction in the first couple of quarters.

Going the traditional c-corp (Delaware) route would have the benefits of the ability to be more stealth (privacy), the ability to get funding, and offset costs in the beginning.

What other benefits would C-Corp have over LLC in your opinion? Especially for a business that is growing rapidly.

How much more time and resources would c-corp take to manage for a solo founder compared to an LLC?

What are the drawbacks of starting as an LLC and then possibly switching to C-Corp?

Is stripe atlas a good choice for a first-time founder?

A lot of questions and I'm planning to talk to a startup lawyer on this but thought some insights from others who have already done this would be helpful.

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    LLCs are pass-through tax entities, which means one level of tax. This is good for owners of the business, but investors often don't want this because it requires additional tax filings for LLC partnership income. You should ask your angels whether they have a preference for this.

    C-Corps are double taxed (at the corporate level and individual level for dividends and capital gains). This is less good if you're the owner of the business and want to distribute dividends for yourself. But for investors, most startups have losses so there are no profits to tax at the first level, and then most investors want long-term capital gains after the company either goes public or sells to an acquirer – they usually are not looking for dividends. So this effectively results in one-level of tax at the long-term cap gains rate for investors.

    You can also convert an LLC to a C-Corp later, but that takes some legal work which is really the only drawback. Conversions are usually not taxable events. But for taking advantage of the QSBS, the 5-year holding period will start at the date of conversion to C-Corp, not the date of starting the LLC. So if your goal is to sell the business after 5 years and use the QSBS benefit, then you should start with a C-Corp.

    LLCs have less paperwork, legal/tax filings, and legal formalities/compliance than C-Corp. For example, C-Corps require having a board of directors, board/shareholder meetings with accurate minutes, etc.

    So in short:

    • If you want run/own the business forever and pull out profits with dividends/distributions, then LLC is usually the way to go.
    • If your investors require a C-Corp (most angels and all VCs do), then you have to go C-Corp.
    • If your intent is to go public, C-Corp is required too.
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      Thank you for the detailed feedback @stevenkkim I think LLC is the route to go to start off with and then transition if need be.

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        One more consideration for LLCs:
        If you are the sole owner of an LLC, then you are a "disregarded entity" from a tax perspective. In the US, this means you file your LLC taxes on your own 1040 tax return typically using schedule C. As a California LLC, I also have to file a CA Form 568 which is pretty straightforward. This is very convenient, and I do my own taxes using TurboTax Home & Business.

        If you have multiple LLC owners, then you have to file partnership returns, usually Form 1065 as well as issuing K-1s to LLC partners. This is a bit more complicated. You can do this yourself using TurboTax Business though.

        Obviously in both cases, you can just hire a tax accountant to handle everything.

        And last, as @lucw mentions below, I would agree that starting out as a sole proprietorship is the best way to go for simplicity, and you only need an LLC once your business starts earning money.

        In California, LLCs cost $800/year to maintain, so I would not start an LLC until I was making at least that much annually. The only reason for an LLC over a sole proprietorship in the early days is if you think your business has unusual litigation or legal risk from day 1.

        You don't need an LLC to get started. You can open a business banking account with a sole proprietorship and take Stripe/Gumroad or whatever payments you want.

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          An LLC also has the option of being treated as an S-Corp for tax purposes, so a sole owner LLC can still pay it's own taxes rather than going the Schedule C route.

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    One thing that is underdiscussed in this community is the Qualified Small Business Stock exemption. Roughly speaking, you can get up to a $10 million exemption on the sale of C Corp shares that have been held for more than 5 years. This can be worth millions depending on the sale price.

    If your vision of success involves "selling my company in the ballpark of 5 years," it's majorly to your advantage to start a C Corp as soon as possible to qualify for the exemption as soon as possible.

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      @jakevoytko great point, the question is it worth to start off as a C-Corp before knowing what level the opportunity really is (which I estimate will take around 6 months).

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    Launch everything under sole proprietorship and only do an LLC when you’ve actually earned money.

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    If you plan on taking money from outside people and issuing them equity in return, incorporating as a C Corp is going to be the way you want to go. As an LLC, you cannot issue stock/options and investors would become members of your LLC. If you plan on taking investments from Angels or VCs, a C-Corp is going to be pretty much required.

    If you're going to bootstrap this with your own money and wait on taking outside funding, then starting as an LLC is a good strategy (Im doing this currently). Once you start making money, you can then elect to have your LLC taxed as an S-Corp so you can take a salary and distributions if your company does exceptionally well. If you then need cash to enter "growth mode" you can always re-incorporate your LLC to a C-Corp, but at that point you have a "good problem" and it'll be worth the legal bills and headache to make it work. If you go the LLC route, incorporate in your state of residence; it'll be less of a pain in the ass.

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      @seanmcgary great points. I'm curious about your comment about incorporating in your state of residence. That does seem to be more convenient but I have heard that what set's Delaware apart from other states is that they have better privacy options. True?

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        For both LLCs and C-Corps every state is going to vary. I know for C-Corps, Delaware seems like you get some privacy benefits in that you don't have to disclose your officers to the state [1].

        The reason why I mention filing in your state of residence potentially being easier is that you would eliminate the probability of needing to also registering your LLC as a foreign LLC and thus basically doing the same thing all over again (of course, YMMV).

        Take for example the state of Texas where I am: If I were to create an LLC in Wyoming (also known for privacy benefits [2]), I would still likely need to register as a foreign LLC in Texas (Texas has a list of things that are not considered "transacting business" and would thus not require registration). But, since Im here in Texas, and creating a Texas LLC is super easy and relatively inexpensive (like $400 to file and no annual franchise tax until you reach a "net surplus" of $1.18MM in the tax year), it's just easier to do it that way.

        Im definitely not a tax/corporate lawyer/expert, so definitely do your own research; this is just info that Ive come across over the last few years in starting my own businesses.

        [1] https://www.legalzoom.com/articles/incorporating-in-delaware-advantages-and-disadvantages
        [2] https://wyomingllcattorney.com/Form-a-Wyoming-LLC/Benefits

  5. 1

    Thanks for all the amazing feedback and information! Based on the response, I'm thinking the following.

    Start as an LLC and then transition to C-Corp before looking for outside investment.

    The thing is for this MVP, I will know within 6 months from launch if this will be a "home run" or a "total flop" meaning 6-9 months after launch I will know if it's worth looking at outside investment to scale more aggressively.

    Now comes the question regarding where to register the entity...I'm based in Colorado but my angel is located in Pennsylvania (if that matters).

    I'm thinking to go the Delaware route because I learned that they have a better privacy structure, does this apply to LLCs as well?

    a, The longer I can go stealth with this venture the better, wouldn't registering the company in Delaware be a better option for that reason?

    b, I don't what to deal with the bunch of crap you undoubtedly get once you are registered in an open database.

  6. 1

    With the details you provided, it is hard to tell. For US citizens, a Wyoming LLC taxed as an S-Corp is a good choice for many, but I am not sure what your business is, how and where you operate, and so on.
    In general, it is easier to manage an LLC, even with multiple founders. It is possible to bring in angel funding, but angels prefer C-Corps. Your situation may be different because the investor would be a family member, so it may or may not be an issue, I don't know.
    I cannot recommend anything between an LLC and C-Corp, but I would strongly suggest you have a look in Wyoming instead of Delaware. It is easier to manage a Wyoming business. Many big companies have incorporated in Delaware, but they have been founded before Wyoming has made itself an attractive option for online businesses.
    And I would suggest firstbase.io instead of Stripe Atlas.

    1. 1

      Thanks, @petartod, I'll check out firstbase! I have heard that Wyoming is a good option for its simplicity.

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      What are the advantages of filing in Wyoming over Delaware? The big advantage of Delaware is that Delaware corporate law is widely familiar with most corporate attorneys which makes find attorneys and doing financings or other deals somewhat easier. As a former corporate attorney in Pennsylvania, I received two books every year - one containing updates to Pennsylvania corporate law, and the other that contained updates to Delaware corporate law. I'm not sure that I ever had occassion to look at Wyoming's corporate law.

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        Wyoming companies are cheaper and easier to run. Delaware has advantages once the business is set for rapid growth, VC, and possibly going to court (due to the case law).
        He is about to launch his MVP. If I was in such a situation, I would have wanted to think about legal as little as possible. That's why I would choose a jurisdiction that offers the most simple terms for running the business.
        Once the business gets traction (if any) and VC funding is an option, I would think about moving to Delaware and switching to a C-Corp.

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