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rvlaw
rvlaw, Attorney
Category: Business Law
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Experience:  NYC Trial Attorney 30+ years; Law professor ; BUSINESS LAW; CONTRACTS; TORTS; Arbitrator
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My girlfriend and I have been working on a dressing, marinades

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My girlfriend and I have been working on a dressing, marinades and snack business for the last year. It has been running as a sole proprietorship (with a dba and EIN) but the time is coming to incorporated so we can issue unsecured, convertible promissory notes to friends and family who have expressed interest in investing. Would it be better (easier/cheaper) to form as an LLC or just skip to and S Corp? My thought it that we could issue the notes against the LLC and the mandatory conversion event would be $200k+ angel/vc (or other) funding; or the biz took off with similar profits -- just preceded by the conversion from LLC to S Corp. FYI: This is an extremely lean start-up, only about $500 of liquid cash and $10,000 of corp. credit card-credit. Thanks so much!

Hi and welcome to JA

 

Choice of S or C Corporation They are really not that different. It depends on your situation:

1. C corp : limited liability protection; ease of raising capital; ease of adding owners and shareholders;taxed as an entity (as opposed to S); C will involve double tax (not so with an S). A corporation may qualify as a C corporation without regard to any limit on the number of shareholders, foreign or domestic. It will last forever.

2. S corp: this is a flow through entity. It is not itself subject to income tax, rather the shareholders are subject to tax on their pro rata share of income based on their shareholdings. The corporation shares must be held by by a resident or citizen individuals or certain qualifying trusts.

 

and

 

LLC advantages:
An LLC can elect to be taxed as a sole proprietor, partnership, S corporation or C corporation (as long as they would otherwise qualify for such tax treatment), providing for a great deal of flexibility.
A limited liability company with multiple members that elects to be taxed as partnership may specially allocate the members' distributive share of income, gain, loss, deduction, or credit via the company operating agreement on a basis other than the ownership percentage of each member. S corporations may not specially allocation profits, losses and other tax items under US tax law.
Limited liability, meaning that the owners of the LLC, called "members," are protected from some or all liability for acts and debts of the LLC depending on state shield laws.
Much less administrative paperwork and record keeping than a corporation.
Pass-through taxation (i.e., no double taxation), unless the LLC elects to be taxed as a C corporation.
Using default tax classification, profits are taxed personally at the member level, not at the LLC level.
For Real Estate companies, each separate property can be owned by its own, individual LLC, thereby shielding not only the owners, but their other properties from cross-liability.

LLC Disadvantages
Although there is no statutory requirement for an operating agreement in most states, members of a multiple member LLC who operate without one may run into problems.
Unlike state laws regarding stock corporations, which are very well developed and provide for a variety of governance and protective provisions for the corporation and its shareholders, most states do not dictate detailed governance and protective provisions for the members of a limited liability company.
Thus, in the absence of such statutory provisions, the members of an LLC must establish governance and protective provisions pursuant to an operating agreement or similar governing document.
It may be more difficult to raise financial capital for an LLC as investors may be more comfortable investing funds in the better-understood corporate form with a view toward an eventual IPO. One possible solution may be to form a new corporation and merge into it, dissolving the LLC and converting into a corporation.
New York, for instance, levies a franchise tax or capital values tax on LLCs. In essence, this franchise or business privilege tax is the "fee" the LLC pays the state for the benefit of limited liability.
New York,also as an example, imposes a publication requirement upon formation of the LLC which requires that the members of the LLC publish a notice in newspapers in the geographic region that the LLC will be located that it is being formed. For LLC's located in major metropolitan areas (e.g. New York City), the cost of publication can be significant.
The management structure of an LLC may be unfamiliar to many. Unlike corporations, they are not required to have a board of directors or officers. (This could also be seen as an advantage to some.)
The principals of LLCs use many different titles-e.g., member, manager, managing member, managing director, chief executive officer, president, and partner. As such, it can be difficult to determine who actually has the authority to enter into a contract on the LLC's behalf.

rich

 

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