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Assuming someone is going to start a business that is to design, build and manufacture a small electronic handheld device.

They post campaigns on Kickstarter, Indiegogo, and other crowd-funding organizations. It's hopeful that these campaigns do good and a lot of start-up capital is raised.

It is intended that the resultant entity producing these devices be a corporation or other LLC for liability purposes and not a sole-proprietorship.

Would the time be right to form the LLC first, before starting the campaigns on the crowdfunding sites? Or would it be permissible for the entity to be formed IF and once the funding is available? For instance, if the campaign on Kickstarter raises 800 thousand dollars, can an LLC then be created, a bank account opened, and the funds deposited there? Or must the entity be created prior to the asking for startup funds?

I know it's kind of a chicken-and-egg situation, but there isn't a lot of funds available yet for hiring attorneys and drawing up papers before the money is raised. Or should this be something for just forming a very quick LLC and then worrying about the right entity after the funds come in?

I'm assuming it would NOT be a good idea to just accept the funding as a person (sole proprietorship).

I live in Texas, but I assume that the business entity would or could be formed in Nevada or Delaware or anywhere there are more favorable conditions.

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    I've created 3 or 4 LLC's now, not once did I hire an attorney. Usually a couple bucks with the state and some paperwork will do it. EIN's are free from IRS. You could also use a "legal service" like legalzoom to do it, it's pretty cheap. – Ron Beyer Jul 25 '18 at 19:10
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    @RonBeyer While it can be done that way and is probably fine for a small business, but if you are thinking of staring a manufacturing company with many investors (or a nonprofit), a lawyer is probably called for in order to avoid securities law and tax issues. – ohwilleke Jul 25 '18 at 19:40
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    @ohwilleke I agree, all my LLC's were single-member and non-funded. I don't think you can call kickstarter's "investors" though (unless like you said, stock was provided but I've never seen that), but there are certainly tax implications that you need to be careful of. You don't want to raise $800k, spend $790k in start-up/first run costs then get a $250k bill from the IRS, but tax issues can also be recognized by using a decent accountant. – Ron Beyer Jul 25 '18 at 20:12
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    @kickstarter itself doesn't issue equity, but some other firms that provide "crowdfunding" do have programs that offer shares in the projects. – ohwilleke Jul 26 '18 at 12:28
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I'm assuming it would NOT be a good idea to just accept the funding as a person (sole proprietorship).

Correct.

Would the time be right to form the LLC first, before starting the campaigns on the crowdfunding sites? Or would it be permissible for the entity to be formed IF and once the funding is available? For instance, if the campaign on Kickstarter raises 800 thousand dollars, can an LLC then be created, a bank account opened, and the funds deposited there? Or must the entity be created prior to the asking for startup funds?

An entity should be (really must be) formed before funds are raised. This is not a hugely expensive thing to do. For a lawyer drafted one, you are talking on the order of $500-$2000, plus some state filing fees which are modest.

I know it's kind of a chicken-and-egg situation, but there isn't a lot of funds available yet for hiring attorneys and drawing up papers before the money is raised. Or should this be something for just forming a very quick LLC and then worrying about the right entity after the funds come in?

If you can't afford the money necessary to hire a lawyer to form an entity without crowdfunding, you aren't ready to open a manufacturing company. You really shouldn't consider trying to start a project of this magnitude unless you have at least several tens of thousands of dollars of personal funds on hand prior to the crowdfunding effort.

You should also have a detailed business plan in place with fact checked budget lines and reality checked revenues estimates before stating your campaign.

If you plan to have patents, you need to at least begin the process of applying to protect them legally, with pre-campaign funds too.

Realistically, most people at your stage do a small round of friends and family and personal savings fundraising and often also find an angel investor or two, before going to the general public in a crowdfunding effort. If you can't convince those people that your project is worth investing in, you are probably not ready to run a manufacturing company which will require you to successfully make many similarly difficult pitches to a variety of people.

What legal entity(s) would be best for startup funded by kickstarter or other investment?

At the state law level a C-corporation and an S-corporation are the same. The distinction is made with a separate tax filing with the IRS in S-corporations.

Crowd funding is a term that is often ambiguous and can be used in a multitude of contexts. If it is more than a gift (i.e. in exchange for stock or bonds) there are also securities regulations exceptions that the offering must be tailored to.

If the funds are donations for a charitable project, a non-profit corporation would usually be the right choice and 501(c)(3) status needs to be obtained in advance.

If funds are raised in exchange for equity interests or non-U.S. citizens/permanent residents own some of the interests, a C corporation would usually be the only permitted choice.

If the funds are raised in exchange for interest paying loans/bonds, or the funds are non-tax deductible gifts rather than investments, then financing isn't a concern for choice of entity, and either an LLC or an S-corporation is usually preferred (or perhaps a limited liability limited partnership in lieu of an LLC which has a different control structure). If funds are raised for an operating business with assets that are leased or tend to depreciate in value and has less than 75 owners, and has owners who are also senior employees of the company, an S corporation will usually be the best choice. If funds are raised for a business that will hold assets expected to appreciate in value, or has a financing or control structure more complex than equal shares of common stock plus bonds, an LLC will usually be preferred.

Assuming someone is going to start a business that is to design, build and manufacture a small electronic handheld device.

A C-corporation or S-corporation rather than an LLC or LLLP is probably preferred for a venture like this one, with the tax classification dependent upon the means of financing and the nature of the owners. Usually, you would use an S-corporation if possible, and a C-corporation if not.

A two entity structure, with an LLC owning the IP (if any, other than a trademark for the products), and then licensing it to an S-corporation operating company, would also often make sense in this scenario.

I live in Texas, but I assume that the business entity would or could be formed in Nevada or Delaware or anywhere there are more favorable conditions.

Not really. A Texas entity would be just fine in this context. A Delaware entity has higher registration fees and legal fees to prepare one, and the advantages it provides for big businesses will often be disadvantages in the kind of entity you are considering. The benefits of Nevada and Alaska trusts are much greater than the benefits of Nevada and Alaska corporations or LLCs. Also, the Texas entity may be more suited to addressing Texas community property issues.

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