Corporate & Securities Law

Skip the LLC

By Ryan Roberts

“My startup will start out as an LLC and then change to a corporation when/if…” This quote, or similar derivation, is a common fact pattern I hear from new clients or general inquiries. I think most entrepreneurs are attracted to the LLC because they hear it is “simple” or “easily-managed” or “flexible.”

Sure, LLCs are all of those. But remember that the LLC was created for tax reasons, and not for typical startup company legal maneuvers like raising capital or employee incentive compensation.

Thus, if there is any possibility that your startup will raise capital, I would skip the LLC and proceed straight to the corporation. Additionally, if you plan on giving your current or future employees incentive compensation, skip the LLC as well.

Of course, you can convert your LLC to a corporation when it is time to raise capital or grant stock options. Just keep in mind that converting from an LLC to a corporation later will be another round of filing fees with the secretary of state and legal fees (if you hire counsel).

If you really want pass-through taxation, file form 2553 with the IRS and elect to be a S-Corporation. And if you still want to be an LLC, check out my article on LLCs.

Full post as published by The Startup Lawyer on January 06, 2009 (boomark / email).