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Your choice of business entity is one of the most important early decisions you’ll make. It affects how much tax you pay, how easily you can raise money, and how well your personal assets are protected.
As a general rule, choose a corporation if you want to build a scalable business, and an LLC if you're looking to build a cash cow. But there is a lot of nuance to making the decision. And while you can change things around later on, this can be complex (and expensive!).
By getting the right structure from the start, you can reduce liability, save on taxes, and set your company up for smooth growth.
Key Questions to Consider
Every founder wants two things: protection from business liabilities and efficient taxes. The right structure helps you achieve both.
Fortunately, both corporations and LLCs will protect you from business liabilities. Both structures will provide you with a liability shield, so long as your paperwork is in good order.
When comparing entities, consider:
- Tax treatment: Will profits be taxed once or twice? Can you use early-stage losses to offset other income?
- Investor appeal: Will venture capital funds or angels be able to invest?
- Employee incentives: Can you issue equity or stock options easily?
- Cost and maintenance: How expensive will it be to set up and maintain?
The Main Types of Entities
Most startups choose from one of three basic structures:
- C Corporation
The classic startup structure. A C Corp is a separate legal entity owned by shareholders and managed by a board of directors. It pays its own taxes, and shareholders pay tax again when profits are distributed as dividends. Despite the “double tax,” this form is preferred for startups seeking outside investment because of its familiarity and flexibility with equity. - S Corporation
A variation of the C Corp that allows “pass-through” taxation. Profits and losses flow directly to shareholders, avoiding corporate-level tax. However, S Corps have strict ownership limits: no more than 100 shareholders, all must be U.S. individuals or certain trusts, and no foreign or institutional investors are allowed. - Limited Liability Company (LLC)
A hybrid that combines corporate liability protection with partnership-style tax flexibility. LLCs are great for small, closely held businesses, but they can complicate fundraising because many institutional investors cannot invest in LLCs for tax reasons.
Why Most Startups Choose Delaware C Corporations
If you plan to raise capital, issue stock options, or scale nationally, a Delaware C Corporation is usually the right choice.
Here’s why:
- Investor familiarity: Most venture funds can only invest in C Corps.
- Predictable law: Delaware’s corporate laws are clear, flexible, and well tested. Their court of Chancery is world renowned.
- Equity structure: You can issue multiple classes of stock (e.g., preferred for investors, common for founders and employees).
- Long-term benefits: Qualified Small Business Stock (QSBS) rules can allow founders and early investors to exclude up to 100% of capital gains after five years. This is insanely powerful.
The downside of a Delaware C Corporation is that you have to deal with double taxation to get money into your own pockets. First, the money is taxed at the corporate level, and then at the personal level. But for most founders of C Corporations, this is not a concern - their primary goal is to scale, not to pull money out.
If your goal is steady income and flexibility rather than venture funding, an LLC might make more sense. It allows you to take profits out each year without double taxation
Consider Who Owns the Company
Ownership structure often determines which entity fits best.
- Few founders, no outside investors: An LLC or S Corp may work well.
- Many investors or institutional funds: A C Corp is almost always required.
- Employee ownership: Stock options and incentive programs are easiest to implement in a C Corp.
For example, a tech startup that plans to grant equity to employees or raise from a VC fund should incorporate as a C Corp. The ability to issue preferred and common shares, offer incentive stock options, and manage cap tables easily all make it the preferred model for scalable growth.
John Wu
Plan How You’ll Take Profits
Think about how your business will return money to owners.
- If you plan to reinvest profits: A C Corporation may be ideal. You can grow enterprise value and potentially qualify for QSBS treatment on sale.
- If you plan to distribute profits annually: A pass-through entity such as an LLC or S Corp avoids double taxation. You pay once, at the owner level.
Each structure has trade-offs. What works for a software startup targeting a Series A is very different from a consulting business where founders draw income each year.
Don’t Forget the Long Game
Tax rules create powerful incentives for long-term planning. Under current U.S. law, if you hold qualified C Corporation stock for at least five years, you may be eligible for a 100% exclusion on capital gains when you sell, up to 10 million dollars. That can translate into millions of dollars in tax savings.
As of 2025, with Trump's Big Beautiful Bill, the amount of capital gains exempted has been increased to 15 million, and the holding period has been updated to be staggered. So for stock acquired after July 4th, 2025, shareholders are entitled to benefit from:
– 50% of the QSBS capital gain after a holding period of at least three years;
– 75% of the QSBS capital gain after a holding period of at least four years;
– 100% of the QSBS capital gain after a holding period of at least five years.
Get Expert Guidance Early
Choosing your entity is not just a formality.
Before filing anything, talk with a startup lawyer and tax advisor who understand your goals. With the right structure, you’ll be free to focus on building your product and scaling your company.
Need help choosing the right structure?
Our firm works with founders every day to set up companies that are investor-ready, tax-efficient, and built to scale. Book a consultation today.
