S Corp vs LLC for web business?

[Scot]

Hey fastlaners! Brand new to the thread, so I apologize if this is in the wrong forum or if it's already been answered. I need some advice and help with a dilemma. Yes, I've researched this, but I've gotten different answers from different "legal" and business information pages, hoping someone on here has run into this situation.

My business partner and I are starting a subscription based website/app business. We like the concept of LLC for our business for several reasons. 1. We don't plan on hiring employees. 2. We like the concept of income pass through, not getting double taxed 3. It's easier to incorporate.

The great thing about starting a website and app, as many of you know, startup capital is relatively low! Well, the only thing we need to really invest money into is our site and app development. We don't exactly have $10,000 laying around to pay a developer. But good news! I have a highschool buddy of mine, who along with his friend are starting a software company. They're both coding geniuses (both have worked for government contractors as coders). We're going to workout a deal where they will create our site and apps, and well allow them to use it in their portfolio to show off their work to future clients. We haven't settled on reimbursement yet, but in order to defer some of the cash cost, we are willing to offer them 5-10% equity.

Here's the questions. Can you "sell" equity in an LLC? Some sites I read said you can, however the 5% equity owners become equal partners. Other sites say that you can limit their involvement or say in the business through our businesses' bylaws.

I know with an S Corp you can sell shares, but we don't know if it's worth the time, money, effort to start an S Corp, get a valuation on a startup, divy up shares, etc etc

If anyone has any experience with this, help would be greatly appreciated!

 

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[healthstatus]

We just reorganized from an S corp to an LLC as we are raising some money and the rules are better for getting money from investment funds that may have foreign investors. Check with an attorney that has done acquisitions.

 

[becks22]

At least in New York, you can split equity in an LLC. Whatever you choose just needs to be in the Operating Agreement or Articles of Organization. My business is an LLC but my former business partner who is retired still gets equity in the business over the next 2 years. This way I didn't have to pay him upfront for the business and I am paying him 63K over 3 years. Everything is spelled out in the Operating Agreement. All business decisions are mine and he has no voting rights. All he has is equity that will be paid out monthly.

Here's a good article to peruse through about organizing your Operating agreement with voting privileges, equity, etc.
http://www.nolo.com/legal-encyclopedia/llc-operating-agreement-30232.html

Good luck and I am glad you found a great deal on your website. Coding can be so expensive and these guys sounds great.

 

[Scot]

At least in New York, you can split equity in an LLC. Whatever you choose just needs to be in the Operating Agreement or Articles of Organization. My business is an LLC but my former business partner who is retired still gets equity in the business over the next 2 years. This way I didn't have to pay him upfront for the business and I am paying him 63K over 3 years. Everything is spelled out in the Operating Agreement. All business decisions are mine and he has no voting rights. All he has is equity that will be paid out monthly.

Here's a good article to peruse through about organizing your Operating agreement with voting privileges, equity, etc.
http://www.nolo.com/legal-encyclopedia/llc-operating-agreement-30232.html

Good luck and I am glad you found a great deal on your website. Coding can be so expensive and these guys sounds great.

This is incredibly helpful, thank you! I'm glad someone went through a similar situation. Coding is the only real startup expense. We just needed to find someone as hungry as us, which worked out. Hopefully they'll bite on the equity, as we estimate this site could grow to a $20-35 mill valuation based on similar sites. I know 5% is a big chunk, but if we don't pay our coders 5% of $0 is $0.

 

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[458]

This is incredibly helpful, thank you! I'm glad someone went through a similar situation. Coding is the only real startup expense. We just needed to find someone as hungry as us, which worked out. Hopefully they'll bite on the equity, as we estimate this site could grow to a $20-35 mill valuation based on similar sites. I know 5% is a big chunk, but if we don't pay our coders 5% of $0 is $0.

20m valuation without two sticks to rub together? Lol, you have alot more to worry about than structure my friend. My advise would be to spend more time on development and less time day dreaming.

 

[Scot]

20m valuation without two sticks to rub together? Lol, you have alot more to worry about than structure my friend. My advise would be to spend more time on development and less time day dreaming.

"As we estimate the site could grow to.." That's all. I'm not like the guys walking on shark tank, pre market claiming a $20 mill valuation based on speculation. There currently is no other service in existence in our space, but a similar model has a $35 mill value.

That to me is called setting a goal.

 

[Evil_Jester]

I've been researching llc too. Make sure you look up "vesting equity." Meaning, the person has to stay active with the company for 1 year to get 25% of the agreed equity, then each month after that they get increasing equity until they get to the full agreed amount

 

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[458]

"As we estimate the site could grow to.." That's all. I'm not like the guys walking on shark tank, pre market claiming a $20 mill valuation based on speculation. There currently is no other service in existence in our space, but a similar model has a $35 mill value.

That to me is called setting a goal.

Just because there's no service in the space, doesn't justifies a 20-35 million valuation. Your missing the point. Your so far away from cashing out that you might as well be a Starbucks barista at this point. Unless you have an extensive track record of starting projects and cashing out at that valuation, quit worrying about structure and generate one dollar, just one. Until then, your wasting your time.

 

[Scot]

Just because there's no service in the space, doesn't justifies a 20-35 million valuation. Your missing the point. Your so far away from cashing out that you might as well be a Starbucks barista at this point. Unless you have an extensive track record of starting projects and cashing out at that valuation, quit worrying about structure and generate one dollar, just one. Until then, your wasting your time.

I understand what you're saying, but you're missing the point. What I said about valuation was harmless musing. This thread has zero to do with idea validation.

It was a simple question, can I pay my developer with equity if I own an LLC? Answer was yes.

Again, I get what you're saying. And if I were here trying to sell equity, claiming how awesome my business was because of proposed valuation, I'd be an idiot. But I'm not. I was simply musing that if I sell 5% and my business gets to my goal, they'd make out.

I make no claims as to my valuation and will not use that to mislead my developer. They are a startup. If they take an equity stake as payment, that is their decision.

 

[458]

I understand what you're saying, but you're missing the point. What I said about valuation was harmless musing. This thread has zero to do with idea validation.

It was a simple question, can I pay my developer with equity if I own an LLC? Answer was yes.

Again, I get what you're saying. And if I were here trying to sell equity, claiming how awesome my business was because of proposed valuation, I'd be an idiot. But I'm not. I was simply musing that if I sell 5% and my business gets to my goal, they'd make out.

I make no claims as to my valuation and will not use that to mislead my developer. They are a startup. If they take an equity stake as payment, that is their decision.

Actually the answer is no, you cannot pay a developer with equity. Generally, intelligent human beings with valuable skills don't enjoy eating out of trash cans. Can you give away equity to a consultant that can guide you in the right direction each quarter? Absolutely. But you will be hard pressed to find a good developer to work on your project for some future valuation pay off.

 

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