October 14, 2026
If you plan to raise money from angels or venture funds, form a Delaware C corp. An LLC fits a business you’ll own and run for profit without outside investors, where pass-through taxation and flexible governance matter more than stock options or venture money. You can convert an LLC to a corporation later, but it takes time and money, and some tax benefits only start once you’re a C corp.
Key takeaways
| C corp | LLC | |
|---|---|---|
| Federal income tax | Taxed at the company level, then again on dividends | Passes through to the owners |
| Limited liability | Yes | Yes |
| Venture capital | Standard | Rarely |
| Equity for employees | Stock options and restricted stock | Profits interests |
| QSBS | Possible, if the requirements are met | Not while taxed as a partnership |
| Governance | Board, officers, stockholders | Flexible, set by the operating agreement |
| Ownership limits | None | None |
A C corp pays tax on its own profits, at a flat federal rate of 21%. If it then pays dividends, stockholders pay tax on them too. That’s the “double taxation” people warn about. In practice, most startups don’t pay dividends. They reinvest everything or run at a loss, so the second layer of tax rarely applies.
An LLC is a pass-through entity by default. Its profits and losses flow to the members’ personal returns, whether or not any cash is distributed, and members who work in the business generally pay self-employment tax on their share. Which structure costs less in tax depends on the business and on each owner’s situation, so work through it with a tax advisor.
Because of who invests in the funds. Venture funds raise money from pension funds, university endowments, foundations and non-US investors. Income passed through from an LLC causes tax problems for those investors, so many funds’ own agreements bar them from investing in pass-through companies. The standard venture documents, from SAFEs to preferred stock financings, are also written for corporations. See Why Do Venture Capitalists Prefer Delaware C-corps?
Section 1202 of the tax code lets holders of qualified small business stock exclude some or all of their gain from federal income tax when they sell, if the company and the stock meet the requirements and the stock is held long enough. Only stock in a C corp can qualify. Interests in an LLC taxed as a partnership never do, and if an LLC converts, the holding period for QSBS starts at the conversion, not when the LLC was formed. Congress expanded the rules in July 2025 for stock issued after that date, including a partial exclusion for stock held for a shorter period. Whether your stock qualifies, and how much it could save, is a question for your tax advisor.
A C corp adopts an equity incentive plan with an option pool and grants stock options or restricted stock. Options are granted at fair market value, set by a 409A valuation, not at a discount. Employees and investors understand this system, and it’s what investors expect to see.
An LLC can give team members a share of future growth through profits interests. They work, but most hires don’t know what they are, holders receive a K-1 and may owe tax on their share of profits, and they can’t be incentive stock options. See Startup Equity Compensation.
Both can offer health insurance and a 401(k). The real difference is equity.
A Delaware corporation has stockholders, who elect a board of directors, and the board appoints officers. Delaware requires only the officers your bylaws name, usually a CEO, a secretary and a treasurer or CFO. The board and stockholders act at meetings or by written consent, and the company keeps records of those decisions.
An LLC is run under its operating agreement, either by its members or by managers they appoint. The operating agreement can set almost any structure the owners want, with fewer formalities. Neither entity limits the number of owners, and both can have non-US owners. The 100-owner limit and the ban on non-US owners are S corp rules. See S Corp vs LLC.
Yes. A C corp’s stockholders and an LLC’s members generally aren’t personally liable for the company’s debts or lawsuits against it. That protection isn’t automatic forever, though. A court can set it aside if the owners treat the company as an extension of themselves. Keep the company’s money in its own bank account, put enough money in to cover what it owes, record major decisions, and sign every contract in the company’s name with your title, not as yourself.
A Delaware corporation files an annual report and pays franchise tax by March 1 each year. For most early-stage startups that’s a few hundred dollars once calculated correctly, plus a registered agent. See Delaware Franchise Tax. If you’re based outside Delaware, you’ll also register in your home state and pay its fees.
An LLC formed in your home state avoids the second set of filings, but it isn’t always cheaper. In California, for example, LLCs and corporations both pay an $800 annual minimum franchise tax. A C corp also files its own tax return, while an LLC with more than one member files a partnership return and sends K-1s.
Yes. Delaware and most other states let an LLC convert into a corporation, and it can often be done without tax, though you should confirm that with your tax advisor. The costs are real, though: legal and accounting work, translating the operating agreement and any profits interests into stock, and a QSBS holding period that only starts at conversion. Investors will want the conversion done before they close.
Starting as an LLC can also make sense when your first backers are companies, or want the early losses on their own returns, and you expect to convert before a venture round. Whether those losses help anyone is a question for their tax advisors. See S Corp vs LLC.
If there’s a real chance you’ll raise outside money, start as a Delaware C corp and skip the conversion. If you’re building a business you’ll fund yourself and keep, an LLC is a sound choice. See LLC Conversion to Corporation.
A C corp still usually makes sense. Buyers are used to acquiring stock, and QSBS can apply to the founders’ gain on a sale. An LLC can be sold too, and some buyers prefer to buy an LLC’s assets. How each sale would be taxed depends on the deal, so ask your tax advisor before you choose.
For more, see What Legal Structure Is Best for Your Startup?, S Corp vs C Corp and When Should I Incorporate My Startup? If you’d like help forming your company, see our Corporation Startup Package or contact us.
