I have a sole proprietor of a business that I'm growing. I foresee doing the following in the near future:
~Getting an office (rather than working from home)
~Hiring more staff
The business is located in California. It is currently doing zero in profits. It is in the journalism sector. It grew on social media quickly (10+k followers ). I'm the sole owner. Do you think it's best to form an LLC or a corp?
I would love to do an LLC for its easy use, but I'm not sure if that's the best option for this if I need to find investors in the future. What do you think?
I think if you are serious y0ou have a bui9sness plan and a line item for legal fees.
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Honestly, whether to go with a LLC or a corp may not matter too much. LLC are now very well accepted, but there is still some uncertainty with them as compared to the body of case law around corps. Long term if you are looking to go public, then a C corp makes sense, but you have double taxation with a C corp. For the time being I think a LLC or a close corp that is also an S corp would be your two best options. And I think you should form the entity within California and not Nevada, Delaware, or Florida. Because you are operating in California, if you form the entity in another state, California will require you to register that entity as a foreign entity and you'll be on the hook to pay an annual tax here in California regardless of your profitability. Plus you'll have to pay for the registered agent in that other state every year, which is not much, but still an extra cost. So in the end forming in another state will not save yo money.
i think a corporation is much easier to use than an LLC for locating investors. Do not contact investors until you have a CPA and a lawyer. The rules are not "common sense" but instead very technical, and failure to observe those regulations is very costly. The securities law definition of fraud are totally different than in a normal civil case, and the remedy of restitution is pretty drastic.
Put together a team of professionals you can communicate with well for the long term. Good luck.
The above is general legal and business analysis. It is not "legal advice" but analysis, and different lawyers may analyse this matter differently, especially if there are additional facts not reflected in the question. I am not your attorney until retained by a written retainer agreement signed by both of us. I am only licensed in California. See also avvo.com terms and conditions item 9, incorporated as if it was reprinted here.
Questions similar to yours come up frequently.
Generally, I recommend that founders discuss the LLC / corporaiton decision with their tax advisors, because the answer will depend on both the founder's personal tax situation and the expected financial performance of the business.
However, because you expect to seek investors, I believe a corporation will be a better choice. Many sophisticated investors will not invest in LLCs.
This information does not constitute legal advice and does not establish an attorney-client relationship.
While I agree with Michael's answer, I have a moderate preference for LLCs, because I think its easier to get the documentation together and I find them more flexible. Really, a lot of this should be driven by tax considerations though.
At this point, in social media with 10,000 active members, you should not have trouble finding business counsel who will take you on in exchange for an interest in the business. Some attorneys even help you put together the financial documentation and pitch book.
I respect the opinions of my colleagues, but in fairness to you the Asker, there is no way to answer your question without knowing more about your needs and objectives. Anything offered will be nothing more than stabs at the wind and anyone who understands this space will have way more questions that answers.
That said, I favor LLCs as well. I mean we have a client who has been in INC's top 50 several years in a row and is still an LLC. But it is also true that institutional investors favor DE C-Corps regards to the entity type to support their investment. This does not mean that they will turn a deal down because of the entity type. That would be like a refusing to eat at a restaurant that has great food because you don't like the name. They often expect the target entity to be an LLC when they are first introduced to it.
Also, converting over to a corp is often very fluid and easy. Some states such as DE have conversion forms for this purpose and if there are no or few hard assets it is no problem. Now on the other hand if you are already courting angels, VCs, etc. and you know that this conversion is a forgone conclusion, then setting up as a corp now will probably make sense.
Putting aside seeding purposes, the key consideration here is usually a question of taxation. In the LLC context all the income passes through to the members and everything is exposed to the self-employment tax. In an S-corp scenario you are required to take a reasonable salary (and this is often a big question and there are lots of pitfalls) and the difference between the salary and other revs can be captured as a dividend, which is not subject to the self-employment tax thus affording you tax savings.
You are going to have a number of legal questions and considerations moving forward, so I suggest that you consult with a lawyer in private and discuss your objectives in more detail. You can start by calling around to several for a free phone consultation, get some insights then pick the best fit to work with.
DISCLAIMER: this is not intended to be specific legal advice and should not be relied upon as such. No attorney-client relationship is formed with the law firm of Natoli-Lapin, LLC on the basis of this posting.
You're in California and likely will have investors outside of California. That means you need to look hard at forming a Limited Partnership to address the concerns non-California residents may have with franchise taxes and the like under California law. A Limited Partnership provides substantially the same pass-through as an LLC. A properly drafted offering document can provide the flexibility you need, but be prepared to pay on the front end to have this done correctly to avoid trouble in the future.
The foregoing is not legal advice nor is it in any manner whatsoever meant to create or impute an attorney/client relationship.
If you want to grow by finding investors then the corporate structure may be the best entity to form. However, that becomes complicated when securities laws becomes a factor. If you find investors from other states and grow in size then there are filing requirements and compliance with the SEC and state laws, which can be costly.
On the other hand, a LLC is easier to form and operate because there is no requirement to maintain corporate formalities. You can run into the same problems with securities laws if the membership interest is being transferred. In a closely held LLC it is less likely that securities laws will apply, but it is a risk and there is potential exposure.
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