Hi, this is David S. Rose, CEO of Gust. Thanks for all these interesting comments. The reason we don’t spend time talking about selling a C corp is because pragmatically it is irrelevant to what we’re doing. Gust Launch is designed for a very specific type of company that makes up a small subset (in fact, less than 10%) of all new businesses. We designed it to handle the specialized case of a startup that is being established from the very beginning to be a scalable, high-growth venture (the kind of company my book ‘The Startup Checklist’ was written for.) This type of business is founded with the intention of raising funds from outside investors such as angels or VCs, the intention of providing most (or all) employees with equity in addition to cash compensation, and the intention of exiting through either an M&A transaction or an IPO within five to ten years.
For many (if not most) other types of businesses, particularly companies that are going to remain as small- to mid-size, cash generating, businesses that will not require a lot of capital investment, incorporating as an LLC in their home state makes a lot of sense. But for the high-growth startup seeking investor funding, incorporating as a Delaware C corporation is without any question whatsoever the most appropriate, least expensive and most standard way to incorporate.
There certainly are tax differences in the treatment of an asset sale compared to a stock sale. But for the kinds of startups that should be using Gust Launch, that is invariably not an issue, because for those businesses an asset sale generally means a bad exit. In fact, in my entire investing and entrepreneurial career, spanning literally hundreds of companies over two decades, I have never once seen a positive M&A scenario in which the acquirer demanded an asset sale. Instead, most target companies forced into asset sales are being sold for less than their basis and less than the liquidation preference or convertible note balance, so the question of tax on asset gains or liquidation distribution simply does not apply.
@GoRudy is correct that in the subset of acquisitions where there is a gain for the target company, it is highly disadvantageous for the target company's shareholders to structure the transaction as an asset purchase. Realistically, they would be getting a lousy deal, but that would have been caused either by the company not being worth much, not negotiating well, or because it has incurred some troublesome contingent liabilities.
The few times I've seen asset purchases with unfavorable tax treatment, the CEO had signed the highest dollar term sheet offer (or the only available one), and they were either oblivious to the tax implications or else the acquirer did not even mention the form of transaction until starting to negotiate the definitive documents. Companies in that position should absolutely negotiate hard for a stock acquisition, a higher price, or carefully work out some other more advantageous tax structure.
But ultimately there's a more general point to be made here. Startups—and the investors who fund them—optimize for growth and financial upside, not to limit downside or engage in complex tax planning that would limit opportunities.
If you create an LLC structure that generates 20% higher after-tax proceeds in the case of an early exit, but substantially lower proceeds in a successful exit because of (1) the Qualified Small Business tax deduction being unavailable, (2) the requirement to make tax distributions and pay income tax along the way, and (3) making the company generally unfundable, you're setting your company up for failure, not success. Put another way, if you knew at the start that your company were heading for an asset sale, you probably shouldn't be doing it in the first place, and for sure no one else should be investing in it.
We—and the majority of people who work with successful startups—have a similar attitude towards starting a business as an LLC and then reincorporating as a C corporation—at a cost of many thousands of dollars—only if and when the company shows promise. That's like refusing to quit your day job until you know your company will succeed. It's understandable, and might even make sense in some cases, but it limits your odds of success and is telegraphing that you are accepting defeat before even getting started.
[BTW, for those founders concerned about double taxation during the early days of a startup, there’s a way to have your cake and eat it too: incorporate as a Delaware corporation and file a “Sub-chapter S” election with the IRS. That will give you all the benefits of the corporate structure (other than QSB eligibility) but also provide the one level of taxation/pass-through treatment that you would get with an LLC. Note that the requirements for sub-S election are: one class of stock (ie, no investors with Convertible Preferred), only individuals as stockholders (no LLCs, corporates or investment SPVs), and only US-based stockholders.]
Folks, I realize that Jason and Matt have set me up to take the fall here as some kind of epitome of evil, and I certainly understand that people don't think it makes sense for us to charge any application fees. I've explained our reasoning for why we charge the $150 fee (not the $15,000 fees that were the subject of Jason's original jihad), and I completely agree that (a) it is imperfect, and (b) the subject is a valid one for rational discussion. But before everyone gets out their pitchforks and torches, I'd appreciate it if we could all work from the same set of facts, which are as follows:
1) New York Angels is not a scam. We have invested over $40 million into 60 startup ventures over the past six years, all from our own personal pockets and not from other people's money.
2) New York Angels is not a venture fund. Unlike VCs, who receive 2% of their entire fund every year to pay their salaries and cover their expenses, none of us get paid a penny, and we pay for our own expenses.
3) New York Angels is not a money-making entity. Think about it for a minute. We each pay $3,500 out of our own pockets each year to fund our operations, and not one of us gets one penny from anything any entrepreneur pays. How on earth can this be a "money making operation", Jason??
4) New York Angels is not a bunch of Wall Street people. It is made up mostly of leading tech entrepreneurs in New York. Our current and former members include the entrepreneur/founders of companies such as About.com, Register.com, Mimeo, PC Forum, Gartner Group, Gilder Lehrman Group, LinkShare, MovieFone, Afternic, 24/7 Media, Technology Solutions, IGN.com, Unwired Technologies, Half.com, Core Software, Research Board, IdeaLab NY, TACODA, MNP, and TargetSpot.
5) New York Angels is not a bunch of tire kickers. Every one of our members commits to investing at least $50,000 each year into companies that present to the group. Unlike many other 'groups' that are full of, and funded by, service providers, 100% of the people you present to are accredited investors who are committed to writing checks.
6) New York Angels is not private club for only well-connected, insider entrepreneurs. Unlike many angel groups, VCs and individual angels, we accept (and read) applications from anyone who applies to us. We don't (yet) require that you know someone, or have connections.
7) New York Angels is not lazy. Every month our angel members meet personally with 10-15 companies looking for funding, of whom 3-5 are asked to come back a second time to present their pitch to the whole group. Before their presentation they are provided extensive personal coaching, and after their presentation they typically have at least one two hour in-depth session with interested investors.
8) New York Angels is not clueless. We've had exits to companies such as CBS and Kodak with returns of up to 12x, and co-invest regularly with half a dozen top-ranked venture funds. We recently ran an analysis of our current portfolio, and while it wasn't as impressive as that of FRC or KPCB, it came in as being roughly in the second quartile from the top relative to the returns of most US venture funds over the past five years.
So, here I am, ready to discuss the question of application fees calmly, but it's really hard to do that when quite a few of the anonymous posters seem to want to blindly hurl personal attacks that simply aren't true.
David S. Rose
Chairman, New York Angels
Personal investor in over 75 startups
New York Angels is a not-for-profit membership organization, which means that the organization itself, unlike a startup company, is not designed to produce a profit. Since it has no shareholders, there is no one to whom any profit (excess of revenue over expenses) would be distributed. Instead, the large bulk of our operating expenses are covered by annual dues of $3500 to $7000 from our investor members.
In terms of nomenclature, "not-for-profit" and "non-profit" are colloquially used to mean the same thing (although technically the former signifies intention, and the latter what actually happens :-). However, you can be a legal not-for-profit organization (such as New York Angels) but NOT also be a public charity (which is what people typically think of when they say "not for profit"; that would mean that you register with the IRS under section 501(c)3 and can take in tax deductible contributions.)
That's a good question, which I'd answer as follows: (a) just because someone says something on TheFunded doesn't make it gospel [grin], but (b) IN GENERAL, and taken as a rule of thumb, the advice is pretty good.
Where it breaks down is in the details, which is why the Angel Capital Association convened a panel to consider this very question, and ultimately came out with a specific, detailed statement on it, which is available online at http://www.angelcapitalassociation.org/dir_resources/entrepr....
Angelsoft's corporate (and my personal) philosophy is as follows: the primary determinant as to whether it is appropriate to charge a fee of any kind to an entrepreneur to pitch, is the answer to the following question: "If you represent yourself to be an investor (or group of investors), is your business model based in any way on the fees you charge entrepreneurs?"
There are a number of 'venture summits', and 'angel groups' and others who represent themselves as investors and charge large fees (often several thousand dollars, for application, appearance, 'training', presentation, diligence, etc.) to companies, because that's how they make their money, regardless of whether or not the company receives an investment (which it rarely does.) In those cases, the whole point of the business is to make money from the entrepreneur fees.
On the other hand, take as an example New York Angels, my own local angel group. We charge a $150 application fee to submit a plan. Is that any part of our business model, and do our members make any money from that fee? ABSOLUTELY NOT! Quite the opposite: while we charge entrepreneurs the $150, we charge OURSELVES $3500 per person per year to allow us to maintain a non-profit organization that enables us to coordinate investments in the first place! So in the case of the 37% of legitimate angel groups that have a similar policy, I/we (obviously) have no problem with the practice.
That said, there are two significant problems with your suggestion for contingency-only fees, one legal and one practical:
Legally, anyone who charges any type of contingent fee relating to equity financing MUST be a registered broker/dealer with the SEC. There are no exceptions to this, and no wiggle room. Since by definition no legitimate angel group is a Broker/Dealer, adopting this policy would immediately end organized angel investing in the US, and you'd be back to having to find angels at your local country club, or by paying an investment banker (who IS a B/D) to introduce you.
The practical problem is the perhaps-unfortunate-but-nonetheless-true fact of the Golden Rule of financing: "S/he with the gold makes the rules." If YOU believe that anyone should be able to send you their business plan and expect you to read it, and then invest in them, then by all means YOU should go forth and do it! But if the only people who are willing to make these risky investments are only willing to do so if you follow the procedures they have set up (for reasons which seem sensible to them), then either (a) it's worth it to you to do so, and you will, or (b) it's not worth it and you won't. But there's no percentage in telling such an investor that he or she should do it your way because YOU think it makes sense for THEM.
Just to put things in perspective, and show you how things look from the angels' side, Angelsoft currently processes over three thousand (3,000!!) funding applications every month. By investing unholy amounts of time, energy and money, we have now made the process so easy that the temptation is overwhelming for virtually every entrepreneur in the world to want to hit virtually every potential investor in the world with his/her plan. While this is understandable from the entrepreneurial side, it should be apparent that it is completely unworkable from the angel side, particularly considering that angel investing is a part-time activity which (given the risk, effort, et al) is a tenuous practice in the first place.
On top of that, another fact that needs to be considered is that the quality of funding applications varies widely (to put it mildly). YOUR plan for FairSoftware.net may be brilliant, incisive, carefully reasoned, and a logical investment for any rational investor...but that would be the exception rather than the rule [grin]. Looked at another way, if angels invest in somewhere between 1% and 5% of deals seeking funding, that means they are in effect (and in aggregate) making a series of value judgments, and rank ordering all 100% of the deals so they can choose those which, in their opinions, are the top 1-5 deals. A fair argument could be made that they make mistakes, aren't perceptive, have poor vision, etc. etc., and that in reality (as with college admissions), EVERY one of the top 10% should be funded.
You could further say that the NEXT 10% down should, in an ideal world, be fundable if we could only match the specific deal to the specific investor under certain specific circumstances. And then, since we are entrepreneurs ourselves with faith in our ilk, let us say that the NEXT 5% we should fund because, even though the plan doesn't make sense and the financials are unrealistic, this might be a really good potential entrepreneur who could break the mold and defy all of our investing experience to date.
OK.
But...that still leaves a full 75%(!) of aspiring entrepreneurs seeking funding for ideas which are clearly and unequivocally inappropriate for an outside angel investment. In my experience, #26 might be the kind of deal for which I'd conceivably take a meeting, but know within the first minute or two that it simply wasn't fundable; #50 might be a deal which might make sense in theory, but not in practice ("I want to start a new, generic online social network"); #75 is a deal that should never have even been put to paper ("I've got a website that will obviously put Google, Yahoo and Microsoft out of business in six months!"); and #100 is from someone who is not necessarily playing with a full deck ("Send me $100 million to publish my book which will instantly result in world peace.")
So, Alain, if you would like to volunteer to read through 3,000 business plans a month and give me a quick write-up on each of them (at your own expense, of course), I would be delighted (and I'm stating this here in public) to give you (subject to appropriate legal structure, etc, etc. etc.) a 1% contingent interest in any investment I end up making in any such deal you send me.
You see the problem. :-)
So therefore, how can we establish a system, given our free-market, capitalist economy, to try to get smart money into good deals? Having been doing this for nearly a decade, I can attest to the fact that it's not easy. Angelsoft is (I believe) the best approach to date, and we are constantly iterating it to maximize the aggregate return to the entire system, which will in turn help entrepreneurs and investors, and make money for Angelsoft as a commercial entity.
But, as with everything else in a free market economy, each player has to make a decision for him or herself as to whether doing something is economically (or otherwise) justifiable. At Angelsoft (unlike ANY other site, service, company or institution) we freely publish our full, live statistics online (at www.angelsoft.net/industry) so that we can be as transparent as possible. We also make our Group Finder (without close second the most comprehensive on the planet) available for free, and we make it trivially easy to apply for free to as many groups as you want. And if, after reviewing our Investor Community posting opportunity, an entrepreneur determines that it makes sense to post his or her plan there for 30 days for $250, then we welcome them. If not, we completely understand, and invite them to continue to use the rest of our tools for free.
I apologize for the length of this post, but you were kind enough to ask, so I figured you deserved a full [perhaps too full?] reply.
VCs pay (because they are for-profit entities with operating budgets that are funded by management fees), angel groups don't pay (because they are typically non-profit, or informal, associations of individuals).
Individual angels don't pay (they get it through their groups), and entrepreneurs don't pay to submit to individual angel groups or to use the site's funding management tools.
The only time entrepreneurs pay is if they decide they want to broaden their funding search by making their plan available to all 450+ groups at the same time, instead of applying to a targeted few individually.
ROFL! mnemonicscloth, you've made my day! It took me an hour and a half to write that post in direct response to Paul's, and it's certainly not boilerplate (feel free to Google any chunk of it you'd like, and I'd be surprised if you'd find even a single sentence written anywhere previously). But if the result was "optimally appealing, synergistic and defensible", the 90 minutes was absolutely worth it [grin].
Seriously, I'm a big fan of Paul's, and he knows it (and we know each other). I was simply responding to an overly broad-brush, inaccurate indictment (that he likely tossed off quickly) with a calm, factual response clarifying what the real story is. I believe it is completely appropriate for this forum, and I'm happy to continue the discussion either here, on my own blog (rose.vc/angelnotes) or by email (david AT angelsoft.net).
For those who would like to delve further into the role of Angels-Other-Than-Paul, there's a good book that has recently been published titled "Fool's Gold?: The Truth Behind Angel Investing in America" by Scott Shane. While I happen to personally disagree with the tone (and some of the conclusions) of the author, there's no question but that he is a serious researcher in the field, and that his underlying facts are essentially correct.
Thanks again for your comments, and feel free to email directly if you'd like to continue taking me to task :-).
-David
Disclaimer: "No Boilerplate, PR, or Legal Personnel were harmed (or used) the making of this post or the previous one."
Alain, as much as I appreciate your kind words [grin], I disagree with your premise. If the alternative is to NOT open the platform to entrepreneurs, how does that help anyone? Even in a world of Web 2.0 and fast-track development, creating, maintaining and operating a site like Angelsoft is very non-trivial. Since the company is not a charity, there needs to be a business model somewhere through which we provide enough value (both real and perceived) that someone(s) is willing to pay for it.
After spending five years of time, effort and a 20 person team developing a single platform that now powers a large majority of the world's organized angel investing, we've finally got something which entrepreneurs [correctly, in my view] believe is worth paying $250 for: powerful tools for managing their fundraising process, combined with access to over 15,000 legitimate investors who use the other side of the platform as their own deal processing tool.
In contrast, there are probably two dozen sites on the web which purport to be 'matching services' for entrepreneurs and investors, but the unfortunate dark secret is that while those sites often charge much, much more (in some cases, thousands of dollars), they have NO investors at all. With Angelsoft, we have created (for the first time anywhere) and provide (completely for free) a single, searchable directory of just about every angel group around. Together with a free "common app" for funding (as you noted), and the ability to apply to multiple groups at no charge through the site with a single click, I think it is fair to say that Angelsoft has done more to help entrepreneurs navigate the often-confusing world of angel investing than anyone else, ever. That's why we're the official software platform of the non-profit national and international associations of angels and angel groups in the US, Canada, Europe, Australia, the Middle East and elsewhere.
I think the best way to look at Angelsoft is in the context of something like LinkedIn, for both investors and entrepreneurs. As with LinkedIn, basic use of the system is free to all, which enabled them (and enables us) to establish a meaningful universe of participants who gain real value from the basic services. With the platform then in place, they (and we) can now layer on additional, value-added services which may (or may not) be worth the cost to any given participant.
Do you think less of LinkedIn because they charge for job postings? How about receiving InMail, for which privilege the sender pays? If you don't want to receive InMail, you simply uncheck a box. If the sender doesn't feel that the ability to send messages is worth $25-$400/month, he or she doesn't pay it. But without the existence of the underlying site, value-added features like InMail and job postings wouldn't be possible in the first place.
With Angelsoft, we are always trying to navigate carefully among the needs of our three constituencies: angel investors, entrepreneurs...and ourselves as a for-profit company. Investors would love it if they only got one deal a month, and it was a guaranteed 30x return that was available only to them, for free. Entrepreneurs would love it if they could have free and unfettered access to the personal emails of 15,000 check-writing investors. I would love it if both of the forgoing paid Angelsoft hundreds of millions of dollars annually :-). Unfortunately, all of the above desires are mutually exclusive.
We think that we've done a pretty good job at creating a compromise platform that supports all three constituencies (well, at least the first two; we're not quite breakeven at Angelsoft yet :-), but we welcome any constructive comments or suggestions as to how we can improve our value proposition to everyone.
Paul, with all due respect, I have to disagree. As both the Chairman of New York Angels, and the CEO of Angelsoft (which grew out of our perceived need for a comprehensive deal management platform), I think it's both inaccurate and unfair to state that angel groups are "generally worthless" and "the best angels are not members".
Taking our own group as an example, we have directly funded over $35 million into 54 companies during the past five years, have had successful exits in sales to companies like CBS and Kodak, and have a membership that includes 75 active, participating angels such as Esther Dyson, Scott Kurnit, Chris Anderson, Roger Ehrenberg, Brian Cohen, Charlie Federman, Lewis Gersh, David Hirsch and many others, all of whom commit to investing at least $100,000 annually. This year we funded about $4 million into 22 companies. How far off are those stats from yours at yC? For my own part, I have personally invested in over 70 startups and serve on half a dozen early stage boards. If that means I'm a "lame investor", I'm a little confused.
Angelsoft was founded to bring to the world of angel investing the type of infrastructure, tools and communications that venture funds and commercial organizations like yCombinator already have. Since angels are, by definition, part-time investors for whom this is not a primary occupation, it has always been a pretty chaotic and haphazard way to put to work the $25 billion annually that angels in the US invest (which is just about the same amount as all VCs put together.) Now that something like 90% of the angel groups in the world, with 15,000+ accredited investors in 43 countries, have all standardized on a single platform, we're finally beginning to bring some order to the chaos.
The Investor Community on Angelsoft was designed, as Ryan Janssen pointed out, to enable groups to syndicate deals with each other. At New York Angels, we have worked together with groups from Boston, California, Washington, Florida, Texas, Nevada, Missouri and Connecticut to fund cool startups...something that would have been logistically impractical prior to the advent of a single, standardized platform.
Now that we've opened it up to direct submissions by entrepreneurs, we seem to be on our way to solving the biggest challenge of angel investing: "I want to increase my deal flow, but I don't want to be spammed by having to respond to every company asking for funding". Instead of having entrepreneurs apply directly to one group for which they may well not be appropriate, the Investor Community allows angels to browse a much wider array of deals, and then affirmatively bring to their group only deals in which they have an interest. As Ryan noted in an early response here, companies that posted to the Investor Community and then were referred into groups by the angels themselves were over 200% more likely to get funded.
Paul, we both know how tough the funding environment is for startups, and we both know that your small investments and support into 102 companies, and our larger investments and support into 54 companies, are only drops in the bucket when one considers that there are over 600,000 companies started each year in the US. But angels and angel groups really ARE a legitimate part of the ecosystem, and I don't think you're doing a service to your readers by disputing that.
yCombinator was a brilliant idea with which you are doing a superb job of execution, and your results speak for themselves. You don't need to promote yC by slinging mud at others who are equally active and supportive of entrepreneurs.
If a VC cares only about the problem and solution, what does that say about how much they want to invest in YOU? Not much. Most early stage investors (like me) have no choice but to 'bet the jockey, not the horse', because we are betting on YOU to take something that barely exists and go to the ends of the earth to make something of it.
In a later stage deal, such as a private equity acquisition, we're investing in the existing company: its cash flow, operations, customers, etc. The CEO is less important, because we can get rid of him/her if necessary and put someone else in. Is that the way you'd like us to think of YOUR deal?
My [very strong] advice is not to do a live demo DURING YOUR POWERPOINT PITCH. You'll absolutely need to do a demo at a later point (perhaps even immediately following your pitch presentation), but what we're talking about here is a very specific piece of performance art: a carefully-tuned, 15-20 minute presentation which is usually presented in front of a group (either a formal group of angels, or a smaller group of VCs). For this presentation, you want as much control as possible, where NOTHING can go wrong.
You can deliver 200% of the value of a live demo in a CANNED demo (or screen shots of a demo). There is no time spent moving between screens, no chance that a bad connection or temporary glitch will make you look like an idiot, no chance that Murphy's Law will rear its ugly head.
Think of this as one of the [very important] communications pieces in your arsenal. You'll also need an elevator pitch (60 seconds, max, no slides), a business plan (so you know what your business is all about), an executive summary (which is what the investor usually reads), handouts to leave behind after your presentation (these are NOT your slides!), and, increasingly these days, a short (5 minute) video, which can be uploaded to the angel's or investor's web site if you're asked to submit your materials that way.
There are actually quite a few startup tech incubators in New York, although the reality is that costs simply are not what they are in Ohio, or elsewhere in the 'real world'. They range from the completely not-for-profit ones such as Pace, to the completely for-profit ones (at rents that would give our colleague from Columbus an instant coronary) such as Eemerge. In between are the ones run by NYSIA, PowerSpace, Rose Tech Ventures, and others.
Darren's idea, while a very appealing concept, will I believe, turn out to be impractical in the long run for lots of reasons. But that's no reason not to try :-)
For many (if not most) other types of businesses, particularly companies that are going to remain as small- to mid-size, cash generating, businesses that will not require a lot of capital investment, incorporating as an LLC in their home state makes a lot of sense. But for the high-growth startup seeking investor funding, incorporating as a Delaware C corporation is without any question whatsoever the most appropriate, least expensive and most standard way to incorporate.
There certainly are tax differences in the treatment of an asset sale compared to a stock sale. But for the kinds of startups that should be using Gust Launch, that is invariably not an issue, because for those businesses an asset sale generally means a bad exit. In fact, in my entire investing and entrepreneurial career, spanning literally hundreds of companies over two decades, I have never once seen a positive M&A scenario in which the acquirer demanded an asset sale. Instead, most target companies forced into asset sales are being sold for less than their basis and less than the liquidation preference or convertible note balance, so the question of tax on asset gains or liquidation distribution simply does not apply.
@GoRudy is correct that in the subset of acquisitions where there is a gain for the target company, it is highly disadvantageous for the target company's shareholders to structure the transaction as an asset purchase. Realistically, they would be getting a lousy deal, but that would have been caused either by the company not being worth much, not negotiating well, or because it has incurred some troublesome contingent liabilities.
The few times I've seen asset purchases with unfavorable tax treatment, the CEO had signed the highest dollar term sheet offer (or the only available one), and they were either oblivious to the tax implications or else the acquirer did not even mention the form of transaction until starting to negotiate the definitive documents. Companies in that position should absolutely negotiate hard for a stock acquisition, a higher price, or carefully work out some other more advantageous tax structure.
But ultimately there's a more general point to be made here. Startups—and the investors who fund them—optimize for growth and financial upside, not to limit downside or engage in complex tax planning that would limit opportunities.
If you create an LLC structure that generates 20% higher after-tax proceeds in the case of an early exit, but substantially lower proceeds in a successful exit because of (1) the Qualified Small Business tax deduction being unavailable, (2) the requirement to make tax distributions and pay income tax along the way, and (3) making the company generally unfundable, you're setting your company up for failure, not success. Put another way, if you knew at the start that your company were heading for an asset sale, you probably shouldn't be doing it in the first place, and for sure no one else should be investing in it.
We—and the majority of people who work with successful startups—have a similar attitude towards starting a business as an LLC and then reincorporating as a C corporation—at a cost of many thousands of dollars—only if and when the company shows promise. That's like refusing to quit your day job until you know your company will succeed. It's understandable, and might even make sense in some cases, but it limits your odds of success and is telegraphing that you are accepting defeat before even getting started.
[BTW, for those founders concerned about double taxation during the early days of a startup, there’s a way to have your cake and eat it too: incorporate as a Delaware corporation and file a “Sub-chapter S” election with the IRS. That will give you all the benefits of the corporate structure (other than QSB eligibility) but also provide the one level of taxation/pass-through treatment that you would get with an LLC. Note that the requirements for sub-S election are: one class of stock (ie, no investors with Convertible Preferred), only individuals as stockholders (no LLCs, corporates or investment SPVs), and only US-based stockholders.]