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CalAttorney2
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Category: Business Law
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Experience:  I am a businesses law attorney, with experience advising and representing owners and investors.
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I would like to start a mobile technology startup in California

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I would like to start a mobile technology startup in California with two co-founders. Should I incorporate as an LLC or a corporation, and what are the benefits of each type of structure for my startup?

William B. Esq. :

Thank you for using our service. My name is XXXXX XXXXX I would like to assist you today.

William B. Esq. :

While I cannot advise you as to which entity would be best for your new business, I can give you a general overview. (The ultimate decision is an "after tax" benefit which only an accountant or tax adviser can give you based on your income, losses, and assets, but here are the structural benefits).

William B. Esq. :

A corporation has the most structured format - it has specific officers and reporting requirements, shares are divided into specific classes and the corporation takes losses and profits and distributes them accordingly. There are often tax benefits to the corporate structure (despite the "double taxation"). The downside is that there is little ability to structure the entity tailored to your needs, and it is very difficult to change the entity in the future (it is described as a "lobster trap" - easy to get into, uncomfortable to live in, and impossible to get out of).

William B. Esq. :

An LLC is much more flexible, it allows you to alter the losses, profits, and allocate taxes through the "pass through taxation" nature of the entity much more easily. Officers and members are defined and changed easily through the operating agreement, and it is much easier to change the entity according to needs.

William B. Esq. :

Again, the "after tax" analysis is usually the deciding factor, ask a tax adviser for the specific benefits (in many cases, the LLC is optimal - that is what it was designed for, but I cannot give you specific advice and any information I provide here is general in nature).

William B. Esq. :

It is possible to change your entity after formation, particularly from an LLC to a Corporation, and many entities do so after they have grown.

William B. Esq. :

(This is often done once the entity begins looking for investment money and is starting to sell shares to raise funds).

William B. Esq. :

I hope the above is helpful, if you have any questions please do not hesitate to let me know and I will follow up quickly.


Thank you for using our service, please do not forget to rate my answer when you are satisfied. I am going to transfer our conversation to the "Q&A" format to ensure you can review the entire response and that I can follow up to any questions you may have quickly. I do wish you the best of luck in this matter.

Customer: replied 3 years ago.

Thanks Bill, I have heard that if you want to raise money from outside investors, it is better to start as a corporation - is that correct?

That is usually correct, particularly to retain control over the company. Shares of corporations are typically easier to transfer than llc interests for larger scale investments.
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