Why is asking "LLC or Corp?" the wrong question?

Here’s another LinkedIn-derived question that merits a better answer.

The question was essentially whether the fellow with some IP to build a business on should form an LLC or a corporation. In typical LinkedIn fashion, off-the-cuff answers that are specific end up being wrong. In my mind, if someone is asking this question, they either want a quick answer without worrying too much about whether it’s the right answer, in which case they might as well just phone a friend, or they want to understand how to make the decision.

As my readers have probably learned by now, I’m happy to educate clients on how to make decisions, on what factors to balance, and point them in the right direction on perceived issues that are just red herrings. At the end of the day, we all have to make our own decisions. Even if you decide to defer to a lawyer to make this sort of call, even if that lawyer is me, then you’ve decided to adopt (if only by proxy) my view of the world and my evidence to you that I understand your goals and plans well enough to make a recommendation that is right for you, just you, in your exact situation at this exact time and place. That’s what I do and how I do it.

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Dan, the answer to that question isn’t usually determined by just how you’ll exit but also who you may need (or want) as Investors and their requirements, the amount of capital your business plan requires, the timeline between here and there, and what the company will look like as it’s operating (the activities it undertakes, the risks it creates, the nature of the competition, and the underlying business model).

The business model is basically how you take capital from Investors, convert it into revenue and gross margin, and do those things at an SG&A level that leads to the generation of free cash flow.

So, in a nutshell, that’s the start of the analysis that I and other startup lawyers do when advising entrepreneurs. Not everyone belongs in a Delaware C-corp even though almost all Silicon Valley-style tech startups do.

I’ve linked two articles that will round this out a bit for you.
Good luck!

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1 Comment

  1. […] Of course, the answer is the same for every other generic business — there’s no way to properly answer the question without knowing all the details. I can tell you the basic model for a VC-financed tech startup, but I can’t advise you that it’s the right structure for you and your company. Until you get properly customized advice, your choices are to ignore the complexities or to use these sorts of answers to learn how to make a decision. […]

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