[AmberShah]

I'm not a lawyer so don't take this as legal advice, but here's my understanding:

I don't think that you are able to give a percentage share of the company with a sole proprietorship. By definition it is owned by him alone and if you transfer the IP to the company, then you are transferring it to him and you have no stake. I am not sure what effect a contract would have, but I think he would be in a position to do what he wanted with the company and you'd have no official stake. For example, what if he sells the sole proprietorship before he gets funding?

As an LLC, I know that you can specify shareholders. I have seen people do this for family-and-friend investors. Although a full-fledged startup typically runs as a corporation.

If I were you, I would insist on creating a corporation (or at least an LLC). From what I've seen it only costs $1,500-$2,500 for an affordable lawyer which isn't really -that- much if you're serious about building a business here. You can even do LegalZoom though it's not typically recommended, but you can just re-do your corporation when you get funded. But the point is that at least your interests will be protected until then.

Personally I'm running as an LLC because I'm not expecting to get funding. If I was actively looking for funding I would have just started a corporation.

[trumbo]

Can you explain why it makes a difference to run as an LLC if you are not expecting funding? My company is expecting funding. So should I insist on creating a corporation instead?

[gyardley]

VCs will insist, as a requirement of the raise, that you change your corporate structure to a C-Corp. This is because LLCs pass-through income to the shareholders. The VCs' limited partners may have severe problems with this - for instance, a foreign entity might suddenly have US income, forcing them to file a US tax return.

In other words, if you know you're raising money, you might as well structure the company correctly in the first place, since you'll just have to pay lawyers to redo it when you raise.

The big risk in going from a sole proprietorship that you don't own to a corporation is to you personally, not to the startup. I would only consider such an arrangement if my co-founder was compelled to follow through on the deal - for instance, if you retained full ownership over the IP you created until the company was properly structured. But why set up a Mexican standoff when you can just do it right the first time? It's not the hardship your co-founder is making it out to be.