Keeping things simple is probably the easiest thing that you can do for yourself, especially when it comes to startup companies. Never try to make more work for yourself than you can actually handle. Growing an actual business, keeping it staffed, and staying ahead of the competition is more than enough for one person to focus on.
When startup companies get organized as a limited liability company, or LLC, those who started the company itself were likely thinking that the paperwork for filing as this type of a company consisted of only one page, thereby making things a lot easier for them.
While all of the documentation may appear to be rather straightforward, the actual LLC status itself is more complex than people might think. This is actually more of a partnership for tax purposes, which can ultimately affect how startup companies can allocate expenses, income, and distributions. Going with an LLC status can also cause you to forgo VC financing as well.
Making your startup company an LLC can also cause issues for your employees as well. Generally, employees who are granted equity interests within a corporation will typically receive stock options. If a startup company obtains equity interests in an LLC, they will generally be granted profits interests, which enables them to gain a share of the company’s future value appreciation. However, the company’s founders must be able to determine the overall value of the company on the same day that they grant profits interest. This is something that can become a big challenge whenever a business has either little or no revenue, no operating history, an inexperienced management team, and intangible assets. Founders will typically take their best guess, and if it turns out they’re wrong, the employees will be the ones who suffer the most.
The owners of an LLC are also classified as being partners for tax purposes, even if they’re only employees. Because of this, they must receive Schedule K-1 tax forms, which are designed to disclose information regarding the finances of the LLC. Furthermore, these partners are required by the IRS to handle their own quarterly tax withholdings.
Even if you were to discover that investors aren’t really all that deterred by your startup company’s LLC structure, they still may insist that you instead become a corporation; however, it’s important to note that this will still come at both a cost and higher taxes.