C-Corp or LLC for idea stage startup?

Question

Let's say you have an idea that you want to start building in earnest, maybe with a partner, and you want to incorporate to gain all the benefits that entails.Do you choose a C-Corp or LLC?As far as I can tell:C-Corp: - More attractive to potential investors? - Already in the "correct" form for many shareholders and future investment (see above).LLC: - Easier incorporation, tax filing, and day one operations. - Lower cost of incorporation. - Potentially a negative signal to investors? (Though some say that for most investors in the right company, they won't care that you have a step to convert to a C-Corp).Convince me one way or another? I suspect that my partner is more interested in forming an LLC, and is also potentially spending too much time on things like incorporation before validating the idea.

Digory · Accepted Answer

IANYL, but LLC with an S-Corp election is the choice for the overwhelming majority of "two guys with a project" businesses -- though that can depend on the state.
YMMV, especially in California & New York, but in most of the country, it's a few hundred bucks to file and get yourself an operating agreement that isn't fill-in-the-blank. A good small business lawyer in your state will have something.
Understand, the LLC protects you against the mistakes and actions of the other guy, and a predictable set of rules if it falls apart. You still need insurance to protect you against you. But that's what you're looking for here.
I tend to be in the "wait for funding to convert to C-Corp" camp. There are some reasons to start there, but they're relatively rare.

nivertech · Answer

IANAL, normally it's better to delay incorporation as long as possible, until you have either significant sales, outside investment, or some large spending (i.e. on patents, contractors, large cloud bills, etc.)
But since you already have a cofounder, it's better to incorporate as a DE C-Corp right away. And of-course hire a startup lawyer to set up all the standard protections in place, i.e. cliff, vesting, etc.
Also you will quickly see how serious your cofounder is.

JohannMac · Answer

If you are self funding, and/or funding from friendly, unsophisticated investors initially, consider first an S-Corp (that&rsquo;s just an IRS election) then transition to C when you have your first professional funding and need multiple classes of stock. Easy taxes, your portion of the losses just go on your 1040. Only a single class of stock is allowed though thus the transition when you take investment from professional investor.

mattcheston · Answer

Wish I had known that this wouldn't include line breaks in some places.