I've considered LLC as well. Will that look ok for a national company? I guess I fear a stigma of being seen as small if I have "LLC" at the end of the company name. Is that silly? The S-Corp and LLC seem nearly the same for what I want to do.
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?
Regarding the fear of being seen as small. This is probably a common fear and it's certainly something I felt at the beginning. Our initial documentation referred to "we" when it was really "I." However, it's good to get over this and embrace your true size. It gives people a chance to be impressed with you.
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.
Put it this way: if every employee will receive 1099 distributions instead of a W2 paycheck, or if no W2 employee will formally be given equity to begin with, you're better off with an LLC.
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.
A LLC should look fine for a national company. There are a number of large companies that are an LLC or have subsidiary LLCs (E-Trade for example).
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.
Nobody cares whether you're an LLC or an S-Corp. You aren't obligated to put the letters after your company name.
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.
If you look around, you'll see some interesting things.
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.
