Would love some advice on best incorporation for my hardware start-up


I recently started a hardware company and Im in the process of setting up my incorporation. We have zero income at this point, but incurring expenses chiefly product design and material goods to produce.

In order to scale, I know we're going to need outside investment. Plus, my partner and I are will to exchange stake and royalties to enlist the kind of outside help we need to get this thing going faster. Would it be silly for us to incorporate as LLC (DE) for the time being so we can stay focused or incorporate as C-Corp and just deal?


asked Nov 2 '12 at 03:11
6 points
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2 Answers


You should discuss it with legal and tax advisers.



  1. If treated as partnership (default), you can potentially deduct current losses on your personal returns
  2. Very easy to create and maintain
  3. No need to pay salaries or deal with stocks

  1. Will need to convert to corp when investors want to join
  2. If earning money - earnings taxed at your individual level


  1. Can distribute and sell shares, easy to have investors
  2. You can accumulate losses to offset future income

  1. Losses are useless if never profitable (or within the NOL period, at least)
  2. Have to pay salaries to officers
  3. Need board/shareholders meetings/bureaucracy to maintain
  4. Double taxation


  1. Can distribute and sell shares
  2. Taxed at personal level (similarly to partnership) and can deduct current losses

  1. Limited to very specific kinds and amount of shareholders (no more than 100, US persons only, individuals, etc), and only one class of shares allowed. Will probably dissuade most investors.
  2. Need to pay salary to officers/shareholders before distributions
  3. Need board/shareholders meetings/bureaucracy to maintain.

Generally you can convert an LLC to a Corporation, either for tax purposes or as a legal entity, and you can convert a C-Corporation to an S-Corporation and vice versa. But there's a time limit that you have to remember when doing it - you have to wait 5 years between each conversion (2 years if the initial conversion was done at the time of creating the entity). There are also significant tax implications for these conversions.

Also, are in you in DE? If not, is there a specific reason to incorporate in DE? Or is it just because you've heard a rumor somewhere that its a good idea but don't really know why?

There are many more different issues and implications that you have to consider, and better discuss it with a professional.

answered Nov 2 '12 at 03:38
5,090 points


Corporation vs. LLC: Because you will be seeking investors, a corporation, with its well-defined investment and ownership structures, makes more sense. (I don't understand how an LLC, more than a corporation, would help you to "stay focused".)

DE vs. another state: If you will be seeking institutional (e.g., VC) investment, then DE makes sense, because that is what most institutional investors will want. Otherwise, incorporate in the state where you will be doing business to minimize fees and taxes (avoid paying both DE and your home state).

Disclaimer: This information does not constitute legal advice and does not establish an attorney-client relationship.

answered Nov 2 '12 at 04:41
Dana Shultz
6,015 points

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