You Don’t Want To Raise VC Money – Do An LLC

I’m chuckling as I write this.  After writing a few posts on S-Corps, C-Corps, and LLC’s, I had an email exchange today with someone that is putting together a small angel round.  He read my posts and concluded that he should do a C-Corp.  He’s only planning to raise a small angel round now and a follow-on angel round in a year – no VC, no significant financing, and no complex capitalization.  In addition, if the business is successful, it’ll start generating profits and positive cash flow in year 3. 

In this case, a C-Corp makes no sense, especially because of the risk of double-taxation if the business becomes profitable.  An S-Corp is fine, but the company potentially has a foreign investor as one of its angel investors.  In addition, the company is already an LLC, so converting to an S-Corp would be a pain.  Since the entrepreneur has no plans to raise money from VCs, the answer – in this case – was to stay as an LLC.

See – it depends.  Snicker.

  • fred krueger

    having done both – several times – i think the C corp is a better stucture for startups.

    First of all — unless you plan to entering the field of dry cleaning — most startups lose money. So double taxation is not an issue. LLC’s can morph into C corps in some ways — but its very hard to do a standard particpating prefered in an LLC. And who wants “membership interests?” when we are all conditioned to thinking “shares”?

    At the end of the day — startups should think big — or go home. Thinking big means spend the money — go for the C Corp. Stop thinking like a laundermat.

  • Chris Yeh

    Bringing together two of your posts….what would you say to the Web 2.0 folks whose attitude can be summed up as “VCs? We don’t need no stinkin’ VCs!”

    If someone plans to sell out, but not raise VC, does the corporate form matter?

  • John Vanhara

    I really don’t understand why is everybody afraid of double taxation on C-Corporation. Let’s say my C- corporation makes $50,000 profit and I as CEO make another $50,000 as salary. In case I own 100% of the company then I would pay corporate tax 15% on the $50,000 profit. And $50,000 goes to my personal taxes. Both are will be taxed in the low tax brackets. On the other hand if that is S-corp all $100,000 goes to my personal income and I will end up paying more on taxes.

  • Eric

    “At the end of the day — startups should think big — or go home.”

    Ah, .com thinking at its best!

  • Zack

    well, mostly go home.. hahago home

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