[redtexture]

LLCs are great for the sole proprietor, which is tptacek's primary experience.

If you don't need outside money, and you don't need co-founders, sure, LLCs can be good enough. Their best use is for BIG-CORP subsidiaries, which is nearly the same as sole-proprietorship activity. Simple: one owner controlling everything, and uncomplicated capital structure.

It's really not that hard to set up a C-Corp, there are millions of them and because of that they are well understood. Compared to LLCs, if there is outside money or multiple founders involved, C-Corps avoid some issues: founder vesting and ownership-options are a challenge to draft well in LLCs and are well understood in C-corps; multi-class stock is pretty straight-forward in C-corps.

[tptacek]

I've never run a sole proprietorship. I started Matasano with 2 partners, and we had dozens of employees when we sold the company.

[redtexture]

Thanks, I stand corrected on your prior participations. Proprietor was too narrow a term, and better that I had said that it represents an example of the larger case where outside participation is simple, or non-existent.

These are the relevant quotations. If one has simple capital structure and do not desire to structure non-cash employee incentives, and have no need for new rounds of investors who might make new structural demands that conflict with prior agreements of LLC present member/owners, then the LLC is good enough.

Quotations:

6 – Equity Compensation - Equity compensation in entities taxed as partnerships is much more difficult, complex and expensive to draft and administer than equity compensation in a C or S Corporation. For example, to grant profits interests in an LLC, it is typically necessary or advisable to “book up” the capital accounts of the owners prior to granting the profits interests, and this must happen at each award. If there are successive rounds of equity grants each year, these books-ups can become very expensive and time consuming. This same complication occurs with options or warrants to acquire LLC interests.

7 – Raising Capital - Raising additional capital through an LLC is much more difficult than raising a next round through a corporation. LLC agreements are more difficult and complex to prepare than their corporate counterparts. In addition, you can hit upon sticky and highly complex tax issues in the LLC context that just don’t exist or arise in the corporate context.

[tptacek]

(We might be the only two people reading these comments.)

I agree that equity compensation is a headache in an LLC compared to that of a C-Corp. But I'm not sure how much money we really had to spend to do it.

I do not agree that having an LLC will meaningfully impact your funding. Obviously, nobody is going to fund an LLC. But you'll work out terms on the premise that you'll do a conversion or reincoporation/merger, and the legal for doing that will be part of your closing costs. Friends who have gotten funded under a C-Corp have told me they had to do this anyways, because VCs wanted the corporation on their paper anyways.

It's a little bit like saying that nobody will fund an actual sole proprietorship. That's true, they won't. But they'd prefer it if you came to them in that form! Because that's the cheapest corporate form to convert to their preferred form.