As my readers know by now I really like the LLC there are however one or two valid reasons to stick with a S or C Corp if you are a US based company. Brad Feld has added another good reasons for why S-Corps may be preferable to LLC’s:
While there are several advantages of an LLC over an S-Corp (ability to issue different classes of securities, ease of set up, informality of operating agreements, lower state taxes, non-US investors), venture funds typically cannot (or donâ€™t want to) invest in LLCs. When a VC invests in an LLC, they risk getting an income tax called UBTI (unrelated business tax income). This type of income is frowned upon by investors in venture funds partnerships and most funds have a provision in their fund agreements that they will use best efforts not to bring UBTI into the partnership. As a result, VC funds shy away from investing in LLCs.
It’s good to see this particular reason
for it. So if you are planning to have investors in the future it would be a good idea for an S Corp.
He mentions the ease of conversion from a S-Corp to a C-Corp. Which is also a valid point.
LLC’s are like Ruby on Rails
However to put it in geek terminology then generally speeking the LLC is the Ruby on Rails of legal entities. It is fast and agile. It allows you to focus on your business now and not on the huge enterprise you will be in 2 years time.
Corporations are like J2EE
The corporation on the other hand was designed historically as an entity to protect outside investors. If you need outside investors from the get go thats fine. But if you are bootstrapping it is just like investing money in developing a huge J2EE application so you in the future can deploy it on a clustered Websphere server to keep your investors happy.
There are valid reasons to using J2EE, but many and most of them are based on outside pressures and not from your real business. If you look at the reasons for why LLC’s aren’t always a good idea you can see that virtually all of them are external compliance reasons. Such as Californias LLC Tax.
LLC is still the way to go in most cases
I still think that it is better in the short term to go for ease of implementation and this is exactly where the LLC counts. If you reach the point where you want investors, then go do the conversion from LLC to Inc and accept the cost at that point.
At early stages of a company the simplicity of an LLC keeps everyones focus on the business and not on future paper millions.
It’s the same thing as scaling your web service. Do you set up an expensive clustered environment while the only people who visit your site are yourselves, your mothers and a stray uncle somewhere. Is it really worth the time, effort and cost of setting up a super flexible “enterprise” when you’re not even sure you have a business yet?
As I have blogged about before there are some good reasons for when you should use C or S Corps, but unless you fit those reasons exactly I think it better to stick with LLC. One of these reasons it would appear is venture funding.