Do LLCs lead to higher valuations than C-Corps?

by eeg_bert. Posted on Sep 17, 2020    0    5


I recently talked with a lawyer about setting up a C-Corp for my startup, since C-Corps are the traditional choice for high-growth tech startups. He insisted that I use the LLC structure instead. His argument was that LLCs lead to ~25% higher valuations than C-Corps, due to the following:

> Sale of Assets > Buyers of businesses prefer, if possible, to get a basis step up in the assets of the business being acquired. This is possible with an LLC and not possible with a C corporation without triggering a second layer of tax. This is probably the biggest complaint or concern with C corporations.

Source: https://www.lightercapital.com/blog/choice-of-entity-llc-vs-c-corporation/

I had literally never heard this before. He further said this advantage is large enough to offset any other tax advantages for C-Corps (most notably the QSBS).

Question: Is this lawyer correct? If so, why don't more high growth tech startups use the LLC structure?


Comments

yogigee

The real question you gota ask him for me is...what the fuck is a sea corpse?

dumpsterfyr 1

Do both. Make one a holding company.

ConfirmedCatholic 1

Its Easier to turn a Delaware LLC into a Delaware LLC with a C-Corp Federal Tax designation, to a Delaware C-Corp, than do do the opposite.

This is why company formation is so important and the small cost to hire a professional like me to guide you through the process is worth its weight in gold.

And Delaware LLC's are just one piece of the puzzle.

Why pay 21% corporate Tax, high dividend and capital gains tax, when you can pay 4% corporate Tax, 0% capital gains and dividends with an "on-shore" structure?


And to boot, any investors can defer all of their capital gains from assets they sell to invest in you, making investing in your business a no brainer.

tsniagaesir1010 1

You have pros and cons of each obviously. He is right that an llc taxed as a pass through entity does not have to deal with the double taxation a c corp does, that is true.

One of the cons is that any outside investors / shareholders that file an 83b election with common or preferred equity will have that portion of the company's profits viewed as personal income and the company has to make quarterly and annual tax distributions for that. I dont know how involved that process is with c corps though (I own an llc)

Another con is that vc and pe prefer to invest in c corps. Honestly, I can't tell you why. It was explained to me by my accountant, but didnt fully make sense to me. It had something to do with the rigor of bylaws and a board of directors being more often than not a fiduciary board. But an llc can have a complex operating agreement and fiduciary boards, so...not sure.

I do know that according to my accountant, you can sequester off some of the company in a separate holding company which is organized as a c corp, and they have two different sets of books.

kippypapa 2

No VC will invest in you unless you are a Delaware C Corp. I’ve heard this from several VCs.