Should I start an LLC then convert later once it is time for investments? Or just start as a C-Corp now?

At the moment what I have are open source software tools, and ideas on how to monetize them with products built on top of them, but it is going to take some time (months, maybe even more than a year) before any monetizable product is recognizable in terms of being implemented (unless investments can accelerate this).

But I think it would be great to have a business entity now, file trademarks/patents/etc, and be prepared, even if I am not making any money now. (Does it make sense to have an entity if not making money?)

I live in California, but hear I can incorporate in any state.

  • What country (and if US, state)? – Kevin Jun 5 '19 at 21:33
  • I'm US, and I live in California, but I hear I can make it in any state (f.e. Delaware). – trusktr Jun 5 '19 at 22:59
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    Except in unusual circumstances it's usually best to incorporate in the state where you operate the business. Consider hiring legal help, for example. Do you want to visit a local attorney's office or deal with a Delaware attorney 3000 miles away? – Carey Gregory Jun 5 '19 at 23:49
  • Regardless of where you incorporate, CA will require you to file CA taxes, paying a minimum of $800. – Kevin Jun 6 '19 at 0:21

C-Corps add a bit of overhead and are rarely necessary for single-member companies. An LLC is relatively cheap and easy, so it could make sense to fire one up now to establish your company name. Also, in most states you can just register the business name with the secretary of state without an LLC. For tax-purposes, your single-member LLC will, by default, be taxed as a sole-proprietorship (same as if you didn't have the LLC).

It could be that the project never takes off, or that you find selling the company outright more lucrative, in either of those cases an LLC (or nothing at all) will do just fine and is cheaper/easier.

However, C-Corp is king when it comes to investors and/or bringing in partners to help develop your product/service. If you think you'll attract investors within the year, then probably worth incorporating from the jump, if you think it is not likely to be so soon, then it might be worth going LLC first and incorporating later.

If you do go LLC first, you'll want to incorporate and issue founders shares well in advance of taking on investors to avoid an unpleasant tax surprise (here's a good Forbes article on Section 409A).

Plenty of resources online to learn more about if/when to incorporate, but if you will be sinking substantial resources into the venture it's most likely worth paying some local professionals to advise you.

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  • Good answer. It may also make sense to wait (even for the LLC) until you have a product (or are in any way making decisions for the company). – xyious Jun 6 '19 at 18:34

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