A practical guide to entity selection — what each structure does, when to use it, and how to make the decision.
Current as of June 2026
Educational content only. This guide explains how these topics generally work. It's not legal advice and doesn't apply to your specific situation. When a decision has real financial or legal consequences, consult a licensed attorney or CPA.
Your choice of legal entity affects four major things: personal liability protection, how the business is taxed, your ability to raise money, and how much ongoing compliance the business requires. Getting this decision wrong isn’t catastrophic — entities can be converted — but conversion takes time, money, and sometimes has tax consequences. Making the right choice initially is simpler.
The most important question is: what do you plan to do with this business? If you’re building something you’ll eventually want to raise venture capital for, a Delaware C-Corp is almost certainly the right answer. If you’re building a profitable small business with no plans for outside investment, an LLC is probably better. Everything in between involves tradeoffs.
An LLC (Limited Liability Company) is the most popular entity type in the U.S. for a reason: it provides meaningful liability protection with relatively low complexity. If the business is sued or goes into debt, your personal assets are generally protected. You pay a filing fee to your state (typically $50–$500), sign an Operating Agreement, and you’re done. No board meetings, no minutes, minimal ongoing compliance in most states.
LLC taxes are flexible. By default, a single-member LLC is taxed like a sole proprietorship — all income flows to your personal return. A multi-member LLC is taxed like a partnership. You can also elect to be taxed as an S-Corp or C-Corp, which sometimes makes sense for tax planning reasons. This flexibility is a genuine advantage over corporations.
The central limitation of an LLC is fundraising. Most venture capital funds are legally prohibited by their own fund documents from investing in LLCs. LLCs can’t issue QSBS (a valuable tax benefit for early investors). They can’t run standard ISO stock option plans. If there’s any meaningful chance you’ll want institutional investment, the LLC structure creates friction that will need to be unwound before a deal can close.
LLCs are the right choice for: profitable small businesses, service businesses, consultancies, real estate holdings, businesses with no plans for institutional investment, and situations where pass-through taxation is more favorable than corporate taxation.
A C-Corporation is the structure virtually all venture-backed startups use. It has three properties that make it the standard: it can issue preferred stock (what investors receive), it can run a qualified stock option plan for employees (critical for talent), and it enables QSBS tax benefits for early investors and founders.
C-Corps are taxed differently from LLCs. The corporation pays corporate income tax on its profits. Shareholders pay tax again if they receive dividends. This “double taxation” sounds bad, but it rarely matters for early-stage startups that aren’t paying dividends — you’re plowing all the cash back into growth. For mature profitable businesses, double taxation becomes a real cost, which is why many small businesses prefer LLCs or S-Corps.
Delaware is the overwhelming choice for C-Corp formation because Delaware has the most mature corporate law in the U.S., a specialized business court (the Court of Chancery) staffed by judges who know corporate law deeply, and extremely well-developed case law that investors and lawyers trust. Investors and lawyers in the startup ecosystem expect Delaware C-Corps. Forming in your home state instead creates friction and can cause confusion.
C-Corps require more ongoing compliance than LLCs: annual meetings, board approvals for significant actions, maintaining corporate minutes, and more. Formation services like Stripe Atlas and Clerky streamline this significantly, and for early-stage companies, compliance is manageable. The requirements scale with the company, and by the time the compliance burden is significant, you’ll have the resources to handle it.
An S-Corp is a regular corporation that has filed a special election with the IRS to be taxed like a partnership — income flows through to shareholders’ personal returns, avoiding corporate-level tax. The key restrictions: no more than 100 shareholders, shareholders must be U.S. citizens or permanent residents, only one class of stock is permitted (no preferred stock), and institutional investors cannot hold S-Corp shares.
These restrictions make S-Corps unsuitable for startups seeking venture capital. No preferred stock means no standard VC investment structure. The shareholder restrictions mean institutional funds can’t participate. S-Corps that take VC money accidentally (before converting) can inadvertently lose their S-Corp election, creating retroactive tax problems.
S-Corps are most beneficial for profitable small businesses where the owners want pass-through taxation but also want some flexibility around salary vs. distributions. A key tax planning strategy: S-Corp owners can pay themselves a “reasonable salary” and take additional profits as distributions — distributions aren’t subject to self-employment tax (Social Security and Medicare), which saves money. Whether this makes sense depends on your specific numbers and a CPA’s analysis.
If you’re forming a C-Corp for a VC-backed startup, form in Delaware. The entire startup legal ecosystem — investors, attorneys, standard-form documents — is optimized for Delaware C-Corps. Forming in California, New York, or anywhere else creates friction: some investors will require you to reincorporate before they’ll invest, and the legal costs increase.
For LLCs and S-Corps (most small businesses), forming in your home state is usually the right approach. If you form in Delaware but operate in California, you’ll need to foreign-qualify in California anyway — paying fees in both states and following both states’ rules. For a small business with no plans to raise from institutional investors, the Delaware premium provides no benefit.
If you form in Delaware but live and work in California, Texas, or another state, you’ll file a “foreign qualification” in your home state. This registers you to do business there. You’ll pay that state’s fees and taxes as well. For VC-backed startups, this is worth it because the Delaware structure is what investors expect.
You have three options for actually forming your entity. DIY means going directly to your state’s Secretary of State website and filing the paperwork yourself. This is inexpensive ($50–$500 in filing fees) but requires you to understand what you’re doing. For a simple LLC in your home state, this is completely manageable.
Formation services like Stripe Atlas ($500 for a Delaware C-Corp with bank account and basic legal docs), Clerky (similar pricing, broader legal document coverage), and Incfile or ZenBusiness (lower cost, less comprehensive) handle the filing and standard documents for you. These are a good middle ground for most founders: fast, reasonably priced, and the standard documents they produce are investor-acceptable.
Working with a startup attorney is the most expensive option ($1,500–$5,000+ for formation) but the most comprehensive. A good attorney will ask the right questions, flag issues you haven’t thought of (like founder vesting, IP assignment, and equity splits), and produce documents tailored to your situation. For companies with complex founding team situations, pre-existing IP, or unusual structures, an attorney is worth it.
Filing your Articles of Incorporation or Organization is just the beginning. To be fully set up, you need to: get an EIN from the IRS (free, takes five minutes), open a business bank account (requires EIN and formation documents), adopt operating or governance documents (Operating Agreement for LLCs, bylaws for corporations), issue equity to founders (critical — don’t skip this), have founders and key employees sign PIIA agreements, and for C-Corps, hold an organizational board meeting.
The two things founders most commonly skip that cause problems later: not issuing equity with vesting (leaving the question of who owns what to be resolved later, badly), and not having founders sign PIIA agreements (leaving IP ownership unclear). Both are critical and both should be done within weeks of formation.
Have questions about this topic? Get Started with Takeoff for help navigating these issues and more as you get off the ground.