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blueshogun96

Choosing a business entity (LLC vs S Corp)

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For a while now, I've been looking at the ups and downs of the two business entities. So far, I personally haven't found a reason to choose one over the other. Previously, I've been leaning towards the Subchapter "S" Corporation. From what I've read, you need to start off as a "C" Corporation before moving into the "S" Corporation so would would that be counted as a downside? I still have much to learn and I try to read what information I can find out there. So in general, I just wanted to ask... - Which would you choose for your company? - Is it possible to change from one entity to another? - Is it easier to raise capital for a Corporation (like I've heard)? I'm asking because the members at gamedev always find some information I've missed one way or another. Thanks.

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Those laws are specific to your state. What does your lawyer tell you?


For a single individual with no plans on having additional owners, an LLC is generally the easiest and cheapest. They typically require less recording and reporting.

- Which would you choose for your company?
I have an LLC, and know many others who chose that format. This was per my lawyer's advice.

- Is it possible to change from one entity to another?
This is state specific. It may require you to dissolve your first business entity and create a second, which would be a lot of paperwork. It is best to just do it the right way the first time. If in doubt, talk to your lawyer.

- Is it easier to raise capital for a Corporation (like I've heard)?
It depends on how you are planning on getting capital. If you plan on assigning partial ownership then an LLC is slightly more restrictive. If you mean loans and other business contracts, then there is no difference.


You should really consult a lawyer before and during starting a business, if only to create a relationship with them.

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First off, S class corporations are far more formal than LLCs, they also have much stricter tax requirements and tend to be generally a lot more work than an LLC.

S class corporations provide some ability to shelter your profits from taxation, this isn't applicable to most people though, but if you're making several hundred thousand or more dollars a year, then the ability to shelter some of it from income tax becomes important. However, that being said, the IRS can reclassify profit distribution via shares as income if they feel that you are attempting to avoid income tax. There are also rather strict ownership rules regarding the shares (such as that they cannot be owned by another business).

LLCs are much simpler to run but your profits are taxed as income, although you do have the ability to file as an S-class corporation when an LLC, provided you turn in the appropriate paperwork for that year. You're taxed yearly, not monthly, and the documentation rules are much more lax and simplistic. In general you probably should set yourself up as an LLC.

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Is it easier to raise capital for a Corporation (like I've heard)?

For loans and other debt instruments - not really. Size and strength of the firm are the chief means of increasing odds in this arena.

For VC/equity - in a sense. Most VC's and other investors will push you towards incorporating due to the favorable nature in the laws, legal structure, and equity handling. I would say however that these investors will generally only be interested in early-stage, meaning you've already put in all the time, money, and creativity into product development.

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Well I'm studying Accounting so I can give you a quick run-down of three types of companies we learnt (each of these three is broken into even more sub-catergories but I haven't learnt that yet).

Sole
- One owner/manager deals with whole business themselves
- Allows greater freedom
- Risky

Partnership
- Has up to 20 owners
- Cheaper
- Risky

Private
- Often one owner
- Expensive
- No Risk

That's a VERY breif explination, use google to research ones that sound more interesting to you.

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I personally chose an LLC because of several reasons:
1) Passthrough income. Easier to do. Income is taxed as personal based upon the percentage of the company you own. I can actually handle doing my own taxes (at least I have so far...)
2) Did not want a board, and currently no need for stock holders or going public.

These were the main reasons for me, but my LLC is a really simple one, and I was mainly looking for protection. Another group I am getting involved with is a much larger organization and I believe the guy in charge is doing S.

It is clear you are looking for protection (business gets sued before you do). The question is how much formality are you looking for? S and C are more of a corporate 'being' in that they have their own income, and everyone has titles and works for that company.

In my experience so far with my LLC, it feels more like a veil than anything else.

-Phil
www.UrbanLegions.net : The Best Super Hero Text based RPG!
interNEKO Ltd. Co

[Edited by - interNEKO on April 23, 2009 1:10:24 PM]

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