C corp vs. LLC

Choosing how to incorporate your business can have huge implications down the road. From understanding tax implications to properly setting yourself up for future investment and growth, you have a lot riding on your choice.

There are different entity types that you can set up when you incorporate. The two options entrepreneurs tend to consider most often are limited liability companies (LLC) and C corps. We’ll break down the key differences between LLCs and C corps you should take into account, then provide some examples of each at the end.

Key takeaways:

• Companies that are looking to raise funding from VCs or institutional investors in the near future should generally incorporate as a C corp.
• If your business doesn’t need that type of investment, then an LLC offers protection from personal liability and additional options for tax structuring—while also being more flexible to manage.
• The Carta Incorporation Resources tool can help determine how best to take this important step.

What is an LLC?

An LLC (Limited Liability Company) is a common type of legal entity that offers a simple way to protect you and your partners from personal liability, secure the company’s intellectual property (IP), and bring on certain partners and investors.

Less complex company structure

Overall, LLCs have fewer legal requirements related to corporate governance that they need to abide by. C corps, on the other hand, need to observe corporate formalities and governance requirements dictated by state law.

Pass-through tax benefits

A main consideration when choosing an LLC are the tax implications. LLCs can pass through taxes to its members. If it’s formed as an LLC, those losses can be passed on to the individual members, who can use the losses to offset certain types of income.

Ability to accept certain types of investment

If you’re looking to have friends and family as investors, an LLC could be a good way to do so without incurring too much overhead work.

What is a C corp?

A C corp is a type of legal entity that also shields its owners from personal liability while enabling the company to have a wider pool of potential investors. C corps are more complicated to run due to tax and state regulations they must abide by.

C corp revenues will be “double taxed,” first at the corporate level and then at the individual shareholder level when distributions are made. C corps have many more regulatory requirements they need to abide by.

Benefits of a C corp

Raising venture capital

For many startups, raising multiple rounds of venture capital will be necessary to grow. In most cases, venture funds will only invest in C corps.

Joining an accelerator or incubator program

Accelerator and incubator programs focus on helping startups scale and typically prefer C corps.

Equity incentive plans

C corps can offer equity incentive plans that include stock options, which is not possible with LLCs.

Adding advisors

If you bring on advisors to guide the company, stock options are common and a C corp will be necessary to distribute those.

Qualified small business stock (QSBS)

QSBS allows for startup founders, employees, and investors to realize tax benefits from their stock holdings.

Examples

Sarah’s construction business

Sarah plans to launch a construction company. In this case, incorporating as an LLC would likely make the most sense since she is not looking to raise large rounds of capital.

The pre-seed agtech startup

Sydney and Alex should look at incorporating as a C corp as they plan to engage with venture capitalists to secure a pre-seed round.

A bootstrapped fintech team

John and Nancy could start as an LLC if they aren’t prioritizing raising venture capital initially. They could switch to a C corp later or begin as a C corp to shield from personal liability.

Choosing which type of incorporation to go with can be confusing, but considering the type of investors you will pursue and how fast you plan to grow is essential.