Boot64 Ventures’ Post

Mark Zuckerberg only made one mistake in the early years of Facebook Did you know he set up the company as a Florida LLC in 2004? Far too many founders are ignorant about the US legal and tax system Sure, they’re focusing on their business, leaving the back office to accountants and lawyers. But in the early stages of seeking out investors, corporate structure matters just as much as product • LLCs are a relatively simple structure that ‘passes through’ taxes to its members. That means all members or unit holders pay proportional tax on profits whether they’ve received any distributions or not.. • For investors that means if the LLC shows losses they can use the K-1 to offset losses against other income • It also means if you show a profit on paper you’re investors will be getting a K-1 that will add to their taxable income without actual dollars to pay the taxes On the other side of the coin… • C Corps shield individual stockholders from liability, letting you have a diverse investor base. • There is potential for double taxation, so revenues are taxed first at the corporate level and then when distributions are made to shareholders, but with early stage startups there isn’t much chance of dividends being paid to investors! • They can be more complex to maintain and some filing costs are higher, but the setup is more favorable for an acquisition or IPO. • They can be set up in any state, Delaware is most popular due to its lower taxation, Wyoming, Texas and Nevada are making pushes to replace Delaware as go to states for incorporation, talk to your attorney for advice. As an investor, the worst thing I can possibly imagine is seeing my portfolio company growing and sending out a K1 tax bill from the LLC with “paper profits”. That's “pay with no play”. One of the only reasons I can think of to use an LLC to start is if you have some IP to protect or other legal requirement whereby you’ll protect your idea for a short timeframe. Many first time founders use the LLC setup to get started, it’s not a deal killer if you put a plan in place to convert to a C-corp early on (again speak to your attorney). There’s a reason that foreign companies with US investors do a ‘Delaware flip’ It’s because, despite the stringent governance requirements, no VC wants to get penalised for their portco taking off. Founders, get clued up on this stuff. Leaning on your business associate or accountant for legal advice could leave you uninvestable....