Start a new business with expectation to bring in co-owners soon, then the C Corp is the way to go!

QUESTION.
I am looking to start a new service on the Web offering a free community builder package. I am on the verge of creating a business entity and I have been reading those books from Nolo about LLCs and corporations. I was wondering if you would kindly give me some "practical" tips on choosing the correct structure. My situation is I have been doing this project as a solo. Eventually, if I get some traction, I'd like to have a few people join me to develop new features and operate this service. At the same time, like many people who are starting a new venture, I am low on cash and time and would like to do something economical (i.e., being able to fully leverage tax breaks), time efficient, as well as being able to offer a share of the business (e.g., stocks) to my future "partners." So far what I gather is a C-corp is the only way to go for offering stock. But I am concerned about the complexity of running a C-corp. And LLCs seems to be the darling structure in the books I've read, but they are hard to spin off ownership. I was also wondering if it would be advisable to first form an LLC and convert to C-corp later. Does make sense and how disruptive is such conversion to the business?

ANSWER.
After reading your email it seems you already know which choice of legal entity to choose - a C Corporation. In many respects a C Corporation is easier to create than an LLC. This is because to form an LLC correctly you would need an operating agreement which is similar in structure and content to a partnership agreement. While it is true that your LLC would be a single-member one initially, you say you would be growing and it would ultimately become multi-member. Single member LLCs don't have much need for an Operating Agreement. But the only way you can offer ownership interests to employees to motivate them to build your business for you is to offer stock and stock options. Thus, you MUST form a C Corporation. And there is no reason to wait to do so. Forming a corporation is really pretty easy. Just fill out the online application in your state to do so. Depending on your state the registration fees can be low or kind of high. And depending on your state there may be a special tax for being incorporated. But that is a cost of doing business. Build that cost into your business plan and move on. If you were a multi-member LLC you'd have to file a Form 1065 (Partnership Tax Return) with the IRS each year. Filling those out is no more complicated than filling out a Form 1120 (Corporate Tax Return). So filling out tax returns should not keep you from forming a C Corporation. And you'll get a few more tax write-offs as a corporation. This is because EVERY expense of the corporation is a tax deduction. Make sure you pay yourself a salary and issue weekly or biweekly checks and a W-2 at yearend. And make sure you zero-out the corporation's net income by giving yourself a bonus at year-end. That way you will avoid double taxation of corporate earnings. Those earnings are supposed to go to you anyway - so make sure they get to you without being taxed twice. Do NOT form an S Corporation. They are a joke. Well, I think I have answered your question. Good luck! Regards, -Jeff

Jeff Lippincott
SCORE.org Counselor
Princeton, NJ
scoreprinceton @ aol.com
http://www.scoreprinceton.org/
http://www.jlippin.com/