Company setup and early instruments
LLC vs S-corp vs C-corp
Why venture-backed companies form a Delaware C-corp, and when an LLC is still the right call.
The first decision that actually matters is which legal entity you create. A legal entity can own IP, sign contracts, hire people and be sued without putting founders' personal bank accounts first in line. Venture investors underwrite thousands of companies with the same template: a Delaware C-corporation. You can fight that template. Almost nobody who wants institutional capital wins.
This is not legal advice. It is the map so a conversation with counsel is short.
The big idea
Three forms show up in founder debates.
| Form | How profits are taxed | Who can own it | VC-friendly? |
|---|---|---|---|
| LLC | Pass-through to members (default) | Flexible | Rarely — K-1s, complex convertibles |
| S-corp | Pass-through, one class of stock | ≤100 US individuals | No — funds cannot be S shareholders |
| C-corp | Entity-level tax; shareholders taxed on dividends and exits | Anyone (funds, foreign, other corps) | Yes — the default |
Concept
Pass-through taxation means the entity itself usually does not pay federal income tax; profits and losses flow to the owners' personal returns. A C-corp is taxed as its own taxpayer. Startups rarely pay dividends early, so the "double tax" worry is mostly about later exits — not year-one cash.
An LLC is fine for a lifestyle business, a consulting shop or a company that will never raise institutional equity. The moment you want a standard SAFE, an option pool and a priced preferred round, counsel will usually push a C-corp. S-corps break because venture funds are partnerships or corporations that cannot be S shareholders, and because you need two classes of stock (common vs preferred).
Why Delaware
Delaware is path dependence plus a specialized court. Investors, lawyers and boards already know Delaware General Corporation Law. The Court of Chancery has deep case law on fiduciary duties, mergers and stockholder disputes. Franchise taxes for an early startup with a standard share structure are usually hundreds to low thousands of dollars per year — confirm current Delaware schedules.
You still register as a foreign corporation in the state where you actually operate (often California or New York) and pay tax there on activity. Non-Delaware formations that "save money" often cost more when the first serious investor's counsel rewrites everything.
Trade-off
Form an LLC only if you are sure you will not raise venture-style equity soon. If that raise is on the roadmap within about 18 months, incorporate as a Delaware C-corp (or plan a clean conversion) so you do not pay twice for structure.
Common mistakes
- Staying an LLC "until the round." The conversion becomes the round's critical path.
- Choosing an S-corp because a CPA likes pass-through. Funds cannot own S stock, and preferred stock is a second class.
- Skipping foreign qualification in the state where you hire and sell.
Check yourself
A two-founder SaaS company wants YC-style SAFEs and an option pool in the next six months. Which entity?
A Delaware C-corp. SAFEs, preferred stock and funds all assume that form.
Why does "C-corps are double-taxed" rarely bite a seed-stage startup?
They do not pay dividends. Tax at the entity and again at the shareholder shows up later, on exits and distributions.
Key takeaways
- Venture investors expect a Delaware C-corp because they need preferred stock, option pools and familiar law.
- An LLC is a pass-through and a poor fit for standard SAFEs and funds.
- An S-corp cannot take most funds as shareholders and cannot have two stock classes.
- Delaware is convention plus Chancery court, not magic; you still register where you operate.
Further learning
Related
Incorporation and the Delaware C-corp
Why VC-backed startups incorporate as Delaware C-corps, how founder stock is issued, and the setup that prevents diligence disasters later.
Authorized shares and founder stock
How a charter's share count, par value and restricted stock purchases turn a new C-corp into a cap table.