Accountants Heart LLCs
I’ve never had a client’s accountant recommend any legal form besides the LLC for a new startup. Even though I heart corporations, I still believe the LLC can be an appropriate legal entity for some companies and ventures. But when it comes to a startup looking to (i) raise capital, and/or (ii) issue incentive equity compensation, the corporation is the proper choice.
LLCs are great because they are “simple.” But eventually the startup will have complex legal needs and the startup LLC will end up having to draft corporation-like provisions into its documents. It ends up being much easier to convert to a corporation at that point rather than adapting the LLC to operate like a corporation.
About the Author
Ryan Roberts is a startup lawyer and represents technology companies through all phases of the startup process, including incorporation, seed & venture financings, and exit transactions. Click here to learn more about his practice.
Subscribe & Connect
Please consider subscribing to The Startup Lawyer, following @startuplawyer on Twitter, or contact Ryan directly.3 Responses
-
Ben says:
Ryan, I’ve been reading about this lately because I’m considering incorporating for a variety of reasons. One thing has me confused, however: it seems that the biggest complaint from potential investors is the pass-through tax classification of LLCs. I’ve seen this repeated all over the web, but the IRS says right here that an LLC can file as a corporation, partnership, or sole proprietorship. There is also a form a company can use to change its classification, so I don’t really follow why this is such a big deal.
Also, since an LLC can amend its company agreement that governs membership, why couldn’t you just as easily create multiple classes of membership as you can create multiple classes of stock in a corporation? Can’t you achieve “incentive equity compensation” that way?
Not to point fingers, but is it possible that so many lawyers so fervently recommend C-Corps because that’s what they know, rather than any real deficiencies with the legal structures of the LLC? I mean that as a sincere (albeit probably ignorant) question, and don’t mean to imply anything.
-
Ben is right: LLC’s can elect to file as C-corporations for tax purposes. And that’s just where the confusion lies — LLC is a legal distinction, while C-corporation is a tax distinction.
I can see Ryan’s point that legal corporations are easier to manage from an ownership change perspective — the paperwork is more straightforward, and the concepts are more familiar to folks. This is something you don’t get as much with a LLC.
As with all decisions, you want to know the pros and cons going in, and then decide on the best fit. It won’t always be the same for everybody, but knowing what Ryan shares here is a great value.
Can't agree more with this. Starting with an LLC may seem to be a simpler way to get started but it ends up being more expensive over time.