LLC vs C-Corp: Which entity should you form?

If you've spent twenty minutes Googling “LLC vs C-Corp”, you've probably noticed that every guide says the same vague thing. Pick an LLC for simplicity. Pick a C-Corp if you want to raise money. That's technically right and totally useless when you're actually trying to decide. This post is the version I wish I'd read before I formed my first company.

The honest answer is that for roughly nine out of ten founders, an LLC is the right choice. It's cheaper, it's flexible, the tax treatment is usually friendlier, and you can convert it to a C-Corp later if you raise venture capital. The C-Corp is the right choice in a few specific scenarios, mostly involving outside investors. Let's walk through what actually drives the decision.

How they're taxed

This is the single biggest difference. An LLC is a “pass-through” entity by default. The LLC itself doesn't pay federal income tax. Profits and losses flow through to the owners' personal returns and get taxed once, at the owner's individual rate.

A C-Corp is a separately-taxed entity. The corporation pays corporate income tax (federal rate currently 21%, plus state) on its profits. When the corporation pays out a dividend to shareholders, those shareholders also pay personal tax on the dividend. That's the famous “double taxation” problem.

In practice, most early-stage C-Corps don't pay dividends, so the double-taxation hit is theoretical until the company is generating real free cash flow. But it does mean that if you're profitable and want to pull money out, you'll usually pay more tax through a C-Corp than an LLC.

One important wrinkle: an LLC can elect to be taxed as an S-Corp or as a C-Corp by filing the right form with the IRS. The legal entity stays an LLC. Only the tax treatment changes. If you're a US-based LLC owner making more than about $80,000 in net profit, an S-Corp election can save you meaningful money on self-employment tax. We unpack that in detail in our post on what an S-Corp actually is.

Who can own them

LLCs are the most flexible entity in the US. Owners can be US citizens, US residents, non-residents, other LLCs, corporations, trusts, or estates. There's no cap on the number of members. There are no restrictions on classes of ownership. You can write an operating agreement that does almost anything you want.

C-Corps are similarly flexible on the ownership side. Anyone can own shares: individuals, other companies, foreign nationals, trusts. C-Corps can have multiple share classes (common, preferred, and various preferred sub-classes), which is what makes them the default entity for venture capital.

Where ownership rules really differ is the S-Corp election. S-Corps are restricted to US citizens or residents only, with a 100-shareholder cap and a single class of stock. If any of your owners are non-US residents, the S-Corp path is closed and you're choosing between an LLC taxed as a partnership and a C-Corp. That matters a lot for international founders. If that's you, the country-specific guides for Indian, British, and Nigerian founders cover the practical setup.

Raising money

Here's where C-Corps win decisively. If you plan to raise venture capital, you're forming a Delaware C-Corp. Not because it's legally required, but because every VC term sheet, every SAFE, every priced round assumes a Delaware C-Corp. Trying to raise as an LLC is technically possible and practically painful.

Why? Two reasons. First, VC funds typically can't hold LLC interests without creating tax problems for their limited partners (unrelated business taxable income, usually called UBTI). Second, the standard financing instruments (SAFEs, convertible notes, preferred stock) were designed for corporations and translate awkwardly to LLCs. You can do it. You'll just spend a lot of legal hours making it work, and most VCs will ask you to convert before they wire money anyway.

For everything that isn't institutional venture (bootstrapping, angel investment, revenue-based financing, a friends-and-family round), an LLC is fine. You can issue membership interests, profit interests, or convertible notes structured for an LLC. The smaller and more bespoke the round, the less the entity type matters.

Compliance and paperwork

LLCs are easier. The list of ongoing obligations for a typical single-member LLC is short:

1. File the annual report (or biennial in some states) with the Secretary of State.
2. Pay the annual state fee or franchise tax.
3. Maintain a registered agent.
4. File a federal tax return (or include the LLC on your personal return if it's a single-member LLC).
5. File the BOI report with FinCEN (currently required for most entities formed after January 1, 2024).

That's about it. No board, no annual meetings, no minutes, no stock ledger to maintain. The operating agreement is the main internal governance document, and you can keep it as simple or as detailed as you want.

C-Corps have more formalities. You need a board of directors. You need annual shareholder meetings and board meetings (or unanimous written consents in lieu of). You need to maintain a stock ledger, issue stock certificates (or maintain electronic records), pass formal resolutions for major decisions, and follow a more rigorous corporate governance pattern. Most early-stage C-Corps still skip a lot of this and nobody cares, but if you raise money the formalities suddenly become enforced.

State fees and ongoing costs

The headline filing fees for forming an LLC and a C-Corp are usually similar (Delaware is around $90 for an LLC and $89 for a corporation). The real cost difference is in ongoing fees and franchise taxes.

Delaware LLCs pay a flat $300 annual franchise tax. Easy. Delaware C-Corps pay franchise tax based on shares authorized or assumed par value capital, which can range from $175 to several thousand dollars depending on how you authorize stock. Most early-stage Delaware C-Corps end up paying $400 to $500 a year if their lawyer set the cap table up well. Founders who let a template authorize 10 million shares at $0.0001 par occasionally get blindsided by a $7,000 bill the following year.

Other states are simpler. Wyoming LLCs pay $60 a year. New Mexico has no annual report fee. California charges $800 minimum franchise tax regardless of entity type or income. Pick your state intentionally. Our post on forming an LLC as an Indian founder covers state selection logic in more detail and the same logic applies to most non-US founders.

When to convert one to the other

The most common path is LLC first, C-Corp later. Start as an LLC, run the business, validate the model, and convert to a Delaware C-Corp if and when you raise institutional capital. The conversion is routine. Lawyers do it constantly. Expect $2,000 to $5,000 in legal fees and a few weeks of paperwork.

Going the other way (C-Corp to LLC) is rarer and messier because of corporate tax consequences on the dissolution. If you formed a Delaware C-Corp by default and now wish you hadn't, talk to an accountant before you do anything.

One scenario where you might form a C-Corp from day one: you're going through a top accelerator (Y Combinator, Techstars), you already have term sheets, or you know you're raising a priced round within six months. In those cases, the conversion overhead is wasted effort and you should form a Delaware C-Corp from the start.

Common mistakes founders make

A few patterns we see:

• Forming a C-Corp because they read it's “what real startups do”, then paying corporate tax and franchise tax for years before raising. An LLC would have been easier and cheaper.
• Forming an LLC in California because they live there, when the company doesn't actually need to be domiciled in California. The $800 minimum franchise tax applies to out-of-state LLCs doing business in California anyway, so domicile elsewhere is sometimes still useful but read the rules carefully.
• Authorizing 10 million shares of par-value stock in a Delaware C-Corp from a template, then getting a multi-thousand-dollar franchise tax bill. Authorize fewer shares, or use the assumed-par-value method.
• Forgetting to file the BOI report. The fines are steep and the form takes ten minutes.

Frequently asked questions

Can I have a single-member LLC and still elect S-Corp? Yes, as long as you're a US citizen or resident. The election is what changes the tax treatment.

Do C-Corps cost more to file? Filing costs are similar. The cost differences show up in annual franchise tax, more involved legal documents, and the ongoing corporate formalities.

Can a foreign founder own a C-Corp? Yes. C-Corps have no nationality restrictions on ownership. S-Corps do, which is why most foreign founders end up choosing between an LLC and a C-Corp, not S-Corp.

Is Delaware always the best state? For C-Corps planning to raise VC, yes. For LLCs, no. Delaware is fine, but Wyoming, Florida, and New Mexico are often cheaper and just as effective for an LLC that won't be raising institutional capital.

What about an LLC taxed as a C-Corp? It's a real option and sometimes the right one (rare, but it happens, usually when a founder wants to use the QSBS exclusion). Talk to a tax accountant if it's on the table.

Where to go next. If you're leaning LLC, the next decision is whether you'll later elect S-Corp status. Read What is an S-Corp for the rules. If you're a non-US founder, the country-specific guides for Indian or British founders walk through the practical setup. When you're ready, form your LLC with EntityEngine in any state.