Legal Question in Business Law in Massachusetts
LLC vs C-corp?
I am in the process of working with
some friends to form an LLC in order
to protect some future IP. We are
forming a startup biotech company.
One issue is that we ultimately wish
to operate the company in MA, but I
am in AZ. We are not sure if we can
start the company in AZ then switch
to MA easy enough. The second issue
is that we will begin seeking VC
money. So, we first wanted to form
the LLC to protect our IP then
convert to a C-corp once we had VC
groups on board. The LLC is
attractive since the taxation is more
straight-forward initially (especially
since we will have no revenue) and
we can set it up as a partnership. The
LLC will be licensing some IP back
from a university that I developed
then once we have VC money we will
convert to a C-corporation. So two
questions does forming a shell
company in one state then
transferring to another state pose a
problem? Second question, would
converting an LLC into a standard C-
corp once the VC money came in be
a problem. It seems forming the LLC
in the state I reside or in the state
one of my partners resides is the
correct choice, but I want to be sure
I am not misreading anything
3 Answers from Attorneys
Re: LLC vs C-corp?
Most VC's will want you to use an LLC to start and will not convert to a corporation until they intend to go public. As to where to form the LLC, I would do it in Delaware as formation there and the creation of offerings will be easier, especially if the financing comes from non-MA based VC's.
If you want assistance with this, please feel free to contact me without obligation. I would not do this without an attorney as you do not want to inadvertantly do something that will complicate your raising of funds.
Re: LLC vs C-corp?
Form of entity is not going to be a serious issue in terms of converting to your contemplated eventual result of "C" corporation. The cost of conversion is minimal, and if your prospective VC doesn't like your initial entity it is very easy to change. Likewise, merging a "foreign" corporation into a corporation chartered in a different state is not going to create any undue complications for you.
Ordinarily, choice of entity is dictated by tax considerations. Pass-through treatment (whether partnership or "S" corporate) can be a real headache for start-up entities that intend to reinvest profits rather than distributing them to the member/stockholders, as those owners would be taxed on income that they are not in fact receiving. Your best resource is a good CPA (not just some guy calling himself an "accountant").
Getting your IP house in order is critical from the outset. No VC will touch the transaction until the rights are properly licensed or conveyed to the company. Thus, after the tax advisor, your next critical participant is an IP lawyer who is conversant with your technology and can package the rights for the new company.
Best wishes,
LDWG
: LLC vs C-corp?
1. You can change the corporate headquarters.
2. Changing the corporate form is not a major problem.
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