Your startup should not be an LLC
“But, but, but… tax efficiency!”
No. Just stop. If you’re a startup founder and your attorney recommends that your company should be a limited liability company, rather than a Delaware C-corporation, fire your attorney and hire an actual venture technology attorney.
Yes, in the abstract, LLCs have a lower tax liability, zero in fact, than corporations at the entity level. However, you’re a startup. You aren’t going to generate taxable income for years, if ever. If you get rolled up or otherwise acquired, you may have operated at a loss for the entire life of the company prior to the liquidity event.
Also, the cost of the work that needs to be done in order to issue equity and raise capital is literally 5–10x higher than those costs for a properly incorporated Delaware C-corporation. This is not an exaggeration. Your legal and accounting bills for such an effort are going to more than swallow your alleged tax savings for several years.
I have never seen a situation where an LLC was the appropriate vehicle for a startup, but I assume it must exist somewhere. The company must (1) expect profits fairly soon, (2) not be in the capital markets, and (3) not be planning to use equity to compensate its personnel. Now that I’ve typed that, I wonder if this mystical startup is really even a startup.
Again, if your attorney even comes close to signaling that an LLC is the right corporate form for your startup, you are probably using a corporate generalist who can help you set up and manage your company, but who lacks actual experience in the vertical and may not realize what a supremely flawed decision this would be.
There are many talented and experienced venture tech lawyers (cough, cough) who can manage through your issues, saving you money now and later by establishing your corporate entity correctly and in a way that the industry expects.
You absolutely should use an attorney for this. Yes, it is expensive but many boutique firms — including mine — will defer their fees until your equity investment, so long as it is going to occur relatively soon. This is not something that is easy to fix if it is flawed from Day One. Pay the money. Get it right.
