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Malachai Frazier
7,399 PointsTo remain an LLC or Incorporate to attract co-founders?
I'm already registered as a Single Member LLC in Michigan and everything is mighty fine. However, I'm realizing that having a co-founder (or two) would not only greatly increase the possibility of success, but would relieve quite a bit of development stress so I can focus more on strategy, selling and having internal 'to bootstrap or not' arguments (ad nauseum). I'm open to any and all suggestions and/or comments! Please and thank you!
3 Answers
James Barnett
39,199 PointsI found this blog post about the pros & cons of a C-Corp.
Pasan Premaratne
Treehouse TeacherHey Malachai,
I would say that your corporate structure shouldn't play a discerning role in attracting a co-founder or two to your business - your idea and enthusiasm should. An LLC is offers certain advantages that may be beneficial to you in the early stages, or even the life, of your company.
1) An LLC offers favorable tax treatment that can serve you better. As a corporation, you would file taxes as a corporation, but as an LLC you can elect to pass those taxes through to any partner in the corporate structure. This can mean passing through the company's taxable profits or losses to your personal tax returns (to obtain a more favorable rate) or to any other partner in the LLC, such as another corporation or investor.
2)Under a C-Corp, your income would be subject to double taxation. You pay taxes at the corporate level and when the income is distributed, you pay at the personal level. This can be avoided with the favorable pass-through taxation of an LLC.
3)There are fewer corporate formalities with an LLC. With a Corporation, you must hold annual meetings and file minutes and reports with the state.
The real advantages of a Corporation is when you want to distribute ownership amongst many shareholders, obtain venture capital financing and provide stock options to your employees. These are cases when a Corporation structure really makes life easier. Also, if you know your business will operate at a loss initially, you will benefit by structuring it as an LLC. As the owner of an LLC, you can deduct the losses from your taxable income.
In summary, Corporations do have a lot of advantages, but a corporate structure shouldn't play a part in attracting a co-founder. If you want to allocate ownership interest with the new founder, you can do that with an LLC as well. As proof of this, look at great companies like 37signals, or even YouTube, that still operate as an LLC (evidenced by the footers on their websites).
Malachai Frazier
7,399 PointsThanks for the input guys! Looks like remaining an LLC and telling any and everyone about the business is the way to go!