Re Incorporating versus LLC

>From an attorney who does business law for emerging technology companies

As another poster commented, you need to consult with your accountant and
attorney, the right answer for you will be fact specific.

Generally, though, LLCs are useful for businesses with start-up period
losses funded by $ from investors - you can "allocate" the losses to the
investors and give them a tax benefit.

LLCs are also useful if the business will own and develop appreciating
property - such as software code---it is very difficult to get appreciated
property out of a corporation without tax cost, LLCs, on the other hand
(which are generally taxed as partnerships do not have this problem).

In the IT business, however, at least in my region of the country (Northern
Virginia) , businesses seeking to hire IT talent must offer stock options -
something that LLCs cannot do.  Hence Corporations are the usual choice.
That should not be a tax problem, just work with your accountant to be sure
to pay out all earnings each year end and thus avoid corporate taxes
(because you have no corporate tax).

If you seek outside capital, institutional VCs prefer the corporate form;
individual investors prefer the LLC because they can use tax losses.  If
that will be your route, I'd be flexible and do what the Money wants.

The idea that you avoid state taxes by incorporating in another state is a
bunch of crock...States tax you based on where you conduct business.  its
true that if you go public the underwriters will likely switch you to
Delaware, but that's a long time away for a start-up.  Generally forming in
your home state will be easiest since you only pay one states fees, and
legal talent familiar with your state is readily available.  State law can
vary and you need someone who is very familiar with local law and practice.
The cost is not usually forming the entity--that's simple and easy, it
arises from fact that if you have more than one shareholder, you'll want a
buy-sell shareholder agreement to address a variety of issues such as
control, voting, capital contributions, admission of new shareholders,
redemption upon death or disability, level of shareholder vote  required for
various actions, etc. Most client have "X" different shareholders with "X"
different views, thus reconciling these creates the need for drafting,
negotiating, etc that runs up legal bills.  But many of these issues can be
important, so you should not ignore them.

Bob Webb
bobwebb2(at)webbcounsel.com
www.webbcounsel.com
www.rssm.com

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