Why our Web Startup decided to become a California LLC
I'd like to preface this article with the fact that I am not a qualified legal advisor.
If you do your research online you will quickly realize that there is no definitive answer on what is the best incorporation structure for web startups (entity type and state of incorporation). The majority of startup presentation target companies who plan on taking in VC funding with an eventual IPO or acquisition in the future. For these cases incorporation structure is more important since you inherently have more legal issues when you bring in institutionalized investors or have shareholders. However the majority of web companies out there don't go public or need mountains of cash to get off the ground. What it comes down is that it is not a one size fits all decision, you need to understand your companies needs and future direction to make the best decision.
For us we are a small company whose goal is to build products taking in as little outside investment as possible. What is important to us is that the legal structure is simple to maintain while offering us legal protection to our personal assets and tax benefits come year end. At the end we chose to become a California LLC for just those reasons. In the rare chance we have another Google on our hands we can always restructure according to what makes the most sense for the situation.
Company Profile
- We are an Internet based service company.
- We are physically located in California.
- We have 2 owners and no full time employees in near term.
- We are not seeking large amounts of initial investment.
- Growth capital most likely from bank loans or friends and family.
Why incorporate as a CA LLC?
- Legal - Protection of personal assets in the event that we are sued
- Flexible taxation - LLC's can elect to be taxed as a partnership (no double taxation) or as a C-Corp (reduced tax brackets by splitting income)
- Easy to maintain - Requirements to maintain a proper LLC is much less than that of a C-Corp.
- Lower Fees - If you incorporated in DE you would still be obligated to pay CA franchise tax and have a registered agent in DE to forward your mail to you (~$100).
- Lower Legal & Accounting Fees - A local and less complicated org structure also translates to less time spent with your tax and legal professionals.
