1. Self-employment taxes: A primary advantage of an S-Corp is that you can avoid having to pay a portion of your self-employment taxes, if you plan on taking more than "a normal salary" for yourself from the business. (I can elaborate on this if you want.)

2. Acquired/Investors: S-Corp's sometimes make it easier to be acquired or to be invested in.

3. Ease of operation: LLC is very easy to setup and maintain from an administrative perspective. (I've always heard this, but admit I don't know exactly how "hard" an S-Corp is, paperwork wise, or how "easy" an LLC is)

4. Shareholder limit: S-Corp can only have 100 shareholders, LLC doesn't have this limit.

5. Profit distribution. S-Corp you must distribute profits in proportion to equity ownership. LLC can distribute however it wants. (This one seems odd, and although I know it to be a rule, I don't know the details of how its carried out or enforced)

(3) S-Corp like a C-Corp requires you to act in ways demonstrating that the corporation is a separate business entity, with its own agenda. If it can be demonstrated in court that you are mixing your personal assets in with your corp, then the court can decide that you no longer receive the liability protection of the corporation. This means doing things such as having formal meetings of the board of directors, keeping minutes, having resolutions for the major business decisions (even if it is affirming the "actions of an employee").

LLCs, on the other hand, from the last I've read of them, do not have the case history saying how much formality is required. According to Nolo's book, you're better off running it in the same kind of formality as a corporation, just in case.

One thing LLCs can do well, is that they are meant to offer the same kinds of liability protection as LLPs (limited liability partnerships), which can be often stronger than a corporation. But it depends on how you set up the LLC's operating agreement.

(4) There are more limits to shareholders than just 100 shareholders for an S-Corp. The shareholders must be US Citizens, and a natural person. In other words, if you have a VC fund or an Angel investing money in from their business entity, you will have to convert the S-Corp to a C-Corp.

LLCs may not have the shareholder limits, but selling membership interests over a certain number will trigger SEC regulations -- the same as shopping for angel investors for a corp.

(5) Caveat: distributing profits from the LLC however way you want requires some extra bookkeeping. You will have to track the tax basis of every single LLC member, and track how it changes depending on money disbursed or put back into the LLC. There should also be clauses documenting how this works in the operating agreement. It is something you'll definitely want to ask your tax lawyer or accountant about.

As far as I know, this feature was inherited from the LLP. It lets you defend the assets held by the entity by starving out creditors -- you have to pay taxes (assuming the LLC elected pass-through taxing instead of corp taxing) on the profits regardless of how much is actually disbursed.

But to reiterate: I'm not a lawyer, this is not legal advice. Most of this stuff I've read through Nolo publications and other books, so check with your own lawyer.

So, if you want to take VC funds, you're going to have to change to a C-corp. There's also a lot of maintenance that has to be done as an S-corp or a C-corp, that you wouldn't have to do if you incorporated an LLC or as a sole proprietorship. If you're just starting off, this might be a little tough to keep up with.

If it's just you, have you thought about setting up a sole proprietorship? You pretty much get your "doing business as" paperwork filed with the county, pay the business license fee and you're in business. After you do that, you can set up a separate bank account with your businesses name, and run the business off that bank account. Business taxes are handled on your own income tax. If the business needs money, put it in the account, if your business makes money, take it out. And, keep a decent set of books that separates your personal finances from the businesses.

As for an LLC, the primary advantage that will give you over a sole proprietorship is protection from getting sued. That is, if your company gets sued, they can't go after your house and bank account. And, it's possible to have multiple people as members of an LLC.

I've been mulling these same questions over, and my decision has been to work as a sole proprietorship until I have to incorporate. And, as far as I'm concerned, I'm not going to have to incorporate until I need to offer shares to employees or take outside investment.

I'm not sure why, in what's effectively a sole proprietorship, you'd do anything other than an LLC.

This isn't a "tech" startup in the YCombinator sense, but there would be multiple people involved and I want to make sure it gets done right. A corporation is partly there to protect our assets and to declare ownership.

[Edit] You have an outside shareholder and non-founding fulltime employees. I retract my previous statement.

Good luck!

EDIT: this is a great resource to go into any meetings with the folks mentioned above knowing what you're talking about though. Knowledge is power! :)

Thanks for the NoLo link. I'll probably pick one of those books up.

But more importantly, once the LLC/S-Corp is formed, how can one properly feed it capital? And what about the money used to set up the corp? Can that be private money? I guess it would have to be because the corp doesn't exist yet, right?

For example when we launched we were competing directly with Ning which had an ultra famous founder, 40+ million in funding and a two year head start. During an interview with TechCrunch, the reviewer said, "Oh, you're a one-man Ning."

That sounds a lot better than, "you're a third-rate Ning." We've since gone off into a vertical where we can actually be the leader but we're still upfront about size. People give a us a lot more leeway and respect for it.

Also, when will people see your incorporation status? The only time people see ours is when we bill them for services. There's no way to hide your size then. It's not like you can present a bunch of fake personas. So your size is going to come out in other ways and when it does you don't want to look like a faker.

We would start with 4 shareholders and have two people working full time to start out, so we could say "we" from the start. :-)

Do all the shareholders work for the company?

Are any of the FTE's NOT principals of the company?

If not, you were right to go for an S-Corp. It's just paperwork, and you're not going to screw yourself over with it. We're converting right now without a huge amount of legal pain.

I would recommend that you find a lawyer and an accountant for at least an initial conversation about this. The selction of an entity-type and how you fund it are very specific to your situation and objectives.

I plan on doing that. I am a little curious about lawyer/accountant selection. Anyone know any good resources in the Atlanta area?

Specifically, avoid "social" referrals from friends/family who did not have professional contact with person they recommend.

Also, try http://www.avvo.com for lawyer recommendations.

Also, try SCORE - it's a lot cheaper to have your basic questions answered that way rather than pay lawyers (something lawyers will not tell you).

The major issues are:

* As soon as you have two "classes" of people (founders and employees), you need to be an S-Corp to give the employees equity.

* As soon as you want to take W2 wages instead of 1099 distributions --- that is, as soon as you want to stop paying your own taxes quarterly --- you need to be an S-Corp. S-Corp Principals take distros, not paychecks.

When I go to Arby's, I sometimes read who actually owns their registered trademarks. It reads something like "Arby's Intellectual Properties, LLC" (don't quote me on that, but it is an LLC).

My apartment complex is fairly sizeable. Before it was sold off to the current owners, the property itself was owned by an LLP and the property management arm is an Delware LLC. This is a national property management firm.

The last time I was out on the road and stopped at a truck stop -- Pilot -- I noticed that Pilot was owned and operated as an LLC.

In Columbus, OH, there was a stadium built maybe eight years ago, called the Nationwide Arena. Nationwide Insurance may have sponsored it, but the stadium itself is held in an LLC.

My point in this is that there isn't really a stigma attached to an LLC. And looking at it in a different way, an S-Corp and an LLC are two different investment vehicles for any future investors you might be looking for. From those above examples, you might see that LLCs are often used when it comes to holding assets. And as for an S-corp, you can always convert it to a C-corp later on; and depending on the size and how much isolation you want to protect the business assets, you'll end up with multiple entities anyways.

Money used to setup the corp can be reimbursed by a board meeting to the incorporator (either with the LLC or the S-Corp) and declared as "capital expenses". It has to be documented; in the case of the S-corp, it should be documented in the initial board meeting and recorded in the minutes. The money you reimburse to the incorporator is paid back in a lump sum, but the capital expense itself is amortized and carried on the books for X number of months (for which, I don't remember value X off the top of my head).

But yeah, it would be private money. So you'll want to figure that into your calculation when you setup how much you're going to capitalize the company at.

With a Corp, you take additional capital by selling more shares. If you don't have any more shares to sell, you will have to amend the articles of incorporation to authorize more shares, and you generally have to file the amendment with the state government. If you have some shares left, the company can sell them to the investor. Often, there are buy-sell agreements in place, to protect the current shareholders from suddenly getting a shareholder they don't want (massively scaled up, it is like the hostile takeover attempted by EA with TTWO, or with the whole Ichan/Yahoo/Microsoft).

LLCs sell additional membership interests, and how you account for that depends on how the operating agreement (read: software configuration) is setup. Some LLCs express ownership in terms of percentages; some express ownership in terms of numbered shares (just like a Corp). How you determine how it is expressed is explicitly spelled out in the operating agreement. The buy-sell agreement you find in a corp is often folded into the operating agreement (example: member may not sell their shares without the unanimous approval of all the current members of the LLC).

There are tons more stuff. Definitely look into the Nolo books. The publisher was started by a lawyer, the books are generally comprehensible. They lay out for you a number of different options you might have so that when you walk into a lawyer's office, you can make informed choices. And just like configuring software, it isn't necessary to enable all the options -- some might even be security risks -- it depends on what you are trying to achieve.

http://www.nolo.com/resource.cfm/catID/401F3CD9-B02C-4FD9-BC...

I ask because I think it's common for hackers to get distracted by the myriad of different options (it's a kind of engaging puzzle) and overbuild the business side before there is a legitimate need.

If you don't mind the embezzlement/laundering/fraud charges.

http://www.inc.com/resources/finance/articles/20040801/noVC....

Fantastic article for what you're wanting to do, especially when it talks about cash flow, though you'll be cutting it close there.

Forget the company. I think I just found my entry for the next YCombinator contest. :-)

I can still loan personal money to the corporation, right? I need an example of how to go about that. Has anyone here done that? My plan was to seed the company, then loan it some cash a few months in. I'm only talking about 10k here.

The Inc. article is good, but it's short on the details I need. Anyone have links to this sort of situation? I can imagine people with tech startups end up in this situation all the time.

The main thing regarding accounting is to create separate accounts for your business.

Its best to have a business checking account and credit card account exclusively for business.

If you pay for something from your personal account like your personal credit card simply show it as a loan from your business to yourself.

You can keep records in this manner until you reach tax filing season (mar 15 deadline). At that time you can use a CPA accountant to file your taxes and he should be able to assist you with your other questions.

Focus on keeping very accurate records and ethical in what is being used for business and you should have no problems during tax time.

If you are taking on a loan in exchange for shares, I would definitely advice you to get a lawyer to write out the terms and hopefully you can afford it then.

Just loan the corporation money on an ongoing basis as a loan, and then pay it back to yourself over time. The only thing you have to worry about here is that you need to pay yourself market rate interest or the IRS won't like it if you get audited. But you don't need to make it complicated by paying interest over time. Just add it up all at the end and pay yourself back in a lump sum.

First: your shares having a fair market value is a "win" condition. Before steady cash flow, even after the (unlikely) VC A-round, they don't really, no matter what you say. I wouldn't make practical decisions based on the eventual number attached to shares.

Second: do the loan, don't buy more equity. What can happen is, a year from now, that loan gave you more equity than your partners. The money seemed like a big deal when you gave it it, but now that you're making $300,000 a month, nobody cares. Now there's friction over the fairness of the equity purchase you made. Not worth it.

http://glinden.blogspot.com/2008/05/starting-findory-funding...

http://aws-portal.amazon.com/gp/aws/developer/terms-and-cond...

I recommend you meet with a lawyer familiar with this type of stuff. If you don't already know or have recommendations for a good lawyer, you can start by visiting your local Small Business Administration or SCORE branch to speak with people there for free. They can also give you some references.

I certainly ended the day smarter than I started it. I found the Atlanta SCORE branch and scheduled an appointment with a counselor to start with. I'll get an attorney involved if need be.

Of all my business ventures/attempts, I feel the best about this one. I'll keep people posted... Thanks again and feel free to keep the comments and karma coming. :-)

What you need to be worrying about is whether or not your product will attract any customers.

Once you focus on that you should be able to relate to what Spartacus did and said before he marched off into his last battle. After killing his horse in front of a group of his soldiers he declared that if the battle is lost the horse will not be needed anymore. If the battle is won than there will be a bounty of Roman horses to choose from.

It's kind of the same way with startups. If your product attracts customers and the money is flowing in just go to an accountant and have him work it all out. If the product flops then it doesn't matter what the heck the rules are. You don't get the play the game anyways.

The product already attracts customers, but a team is needed to grow our ability to make and sell the product. There is an actual physical product here, but we need a better way to make and sell it.

the way I read it, you can incorporate with 1500 shares at only a $60 a year min. tax rate. This way you can keep your costs low, and not have the limitations of an LLC.

http://www.corp.delaware.gov/frtaxcalc.shtml