LLC vs C-Corp: Which structure is right for your startup?

If you're forming a company and you haven't filed yet, the most consequential decision on your desk is entity selection. The wrong choice can cost you tens of thousands in extra tax - and force a painful conversion later. Here's how we think about it.

Why structure matters

Entity choice determines three things up front: how you're taxed, how you can raise money, and how much paperwork your business creates. None of these are nice-to-haves - they show up as real dollars every quarter.

The LLC: the operator's vehicle

A Limited Liability Company is the default for founders who are bootstrapping or running a services / product business they intend to own and operate themselves. It's cheap to form, flexible to run, and taxed as a pass-through by default.

What's good about an LLC

• Pass-through taxation - profits hit your personal return; no double tax.
• Minimal paperwork. Most states need only an annual report and a small fee.
• Flexible profit splits between members if you have partners.
• Easy to add an S-corp election later if your profits get large enough to justify it.

What's not great about an LLC

• Self-employment tax on all profits if you're a single-member LLC taxed as a sole prop. That's 15.3% on top of regular income tax.
• Hard to raise venture capital. Most VC funds can't invest in LLCs without UBTI complications, and term sheets will require conversion.
• Granting equity to employees is messier - profits interests work but require careful 83(b) and valuation work.

The C-corp: the investor's vehicle

A Delaware C-corp is the default for any startup planning to raise venture capital or grant equity to employees. It's more paperwork and worse tax in the short term, but every part of the investor + employee equity machinery is built around it.

What's good about a C-corp

• Clean equity grants for employees and advisors via stock options and RSUs.
• VCs and most institutional investors can write checks without entity-conversion drama.
• Section 1202 qualified small-business stock (QSBS) potentially excludes up to $10M in capital gains tax - only available on C-corp stock.
• Familiar governance: cap table, board of directors, share classes.

What's not great about a C-corp

• Double taxation: the corporation pays tax on profits, and you pay tax again on dividends or sale proceeds.
• More compliance: annual report, franchise tax, separate corporate tax return, board minutes.
• Higher formation and ongoing legal costs - typically $500–$2,000+ to set up correctly.

The S-corp: an election, not an entity

An S-corp isn't a separate entity type. It's a tax election you can make on top of an LLC or corporation, telling the IRS to tax you under Subchapter S. The big perk: profits above a reasonable salary aren't subject to self-employment tax.

S-corp election usually makes sense once your business is netting $80k+ per year. Below that, the cost of running payroll for yourself and filing a separate 1120-S return eats most of the savings.

Side-by-side comparison

Common founder mistakes

1. 1Forming an LLC because it's cheaper, then trying to raise a year later. You'll pay for both formations and a conversion.
2. 2Forming a C-corp "just in case" when you have no plans to raise. You're stuck with double tax and franchise fees.
3. 3Filing an S-corp election before turning a real profit. You spend more on payroll/filing fees than you save.
4. 4Filing in your home state when you plan to raise. Convert to Delaware before the term sheet, not after.
5. 5Forgetting the 75-day window for S-corp elections. File Form 2553 within 75 days of formation (or by March 15 each year).

What to do next

If you know you're raising VC: Delaware C-corp, period. Worth doing right with a startup-friendly law firm.

If you're a profitable LLC over $80k net and not raising: talk to a CPA about an S-corp election before March 15.

Anything else: a single-member LLC in your home state is usually the right answer. You can convert or elect later as your business grows.