I’m planning on bootstrapping my startup for at least the first six months. However, I do plan to seek investment down the line. Is it easy to switch from an LLC to a C-Corp once I’m ready for investment? What’s the best approach?
ANSWER:
by John Frankel, Founder of ff Asset Management
John Frankel
Yes. The advantage of having an LLC is the pass through of losses that can offset other income. Thus, many companies do not make the switch until they start to rack up profits. It’s easy to switch. Note that most later stage VCs require a C Corp, but at ff Asset Management we do not.
Take the above as working guidelines, but always seek professional tax advice.
Additional Advice by Founders Space:
An LLC is definitely easier to manage and preferable for most small businesses. However, if you are serious about getting venture funding, at some point you’ll need to convert to a C Corp — usually a Delaware C Corp. That said, it’s not a problem to start as an LLC and see how things develop. Also, many companies convert upon funding. So staying an LLC until you secure a term sheet from a VC shouldn’t be an issue.
Tip: When incorporating, consider using a filing service such as Legal Zoom where they file all the documents with the state, get your record book, and more.
sounds like everyone is pushing a delaware C corp…
its not all that simple. are you going to offer stock? then you need to be an s corp or a c corp or set up both and have them run different parts of the company… the costing side is handled by the c corp so the taxed amount is minimal while the revenue side is s corp with the funds being pass though.
if you are selling stock to raise funds either option works (llc’s can not offer stock) although if you are looking for foreign investors you’ll nedd the c corp as only US citizens can own shares in an s corp.
if you run with the split corps you can be in what ever state you are ACTUALLY in… no need to run to delaware…
Are there any investors that can comment on this? I have heard that both angels and VC’s really like to see a prospective portfolio company already setup as a c-corp, preferably a Delaware c-corp. But as a CPA I understand the benefits in tax savings and simplicity in setting up an LLC upfront.
Any additional thoughts would be appreciated!
Advantage of LLC is the pass through of losses that can offset other income – thus many do not make the switch until they start to rack up profits. Easy to switch. Note that most later stage VC's require a C corp, but at ff Asset Management we do not.
Take the above as working guidelines, but always seek professional tax advice.
Easy to do. Just send a letter to Sec of State and convert over.