LLC vs C-Corp vs S-Corp: Which Entity Type Does Your Startup Need?
Most founders pick an entity from a formation-service checkout, not from the math. The math is not complicated, but it depends on three things the checkout does not ask: whether you are raising US venture capital, whether you are profitable yet, and whether all your owners are US persons. This piece walks the decision, the numbers behind it, and the mistakes that quietly cost the most.
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General information only. Not legal, tax, or financial advice.
TL;DR
- Raising US institutional capital, or planning to inside 18 months: Delaware C-Corp.
- Profitable owner-operator ($60,000 plus profit), US persons only: LLC with an S-Corp election typically saves $5,000 to $15,000 per year in self-employment tax.
- Pre-revenue or unsure: LLC. Converting to a C-Corp later costs $3,000 to $10,000, reasonable insurance against forming the wrong thing now.
- Non-US founder: read the non-US founders' guide first. S-Corp is closed to you and a US LLC carries Form 5472 obligations.
- Liability protection is roughly equivalent across all three when you maintain the veil. Tax treatment, fundraising compatibility, and admin overhead are where the differences live.
The 30-second answer
A short decision tree gets most founders to the right starting point:
- Raising US venture capital, or planning to inside 18 months? Delaware C-Corp. Stop here.
- Non-US founder? S-Corp is unavailable to you. See the non-US founders' guide.
- Generating $60,000 plus in annual profit? If not, start with an LLC; convert later when needed.
- Profitable owner-operator with no outside investors? LLC with an S-Corp election is usually the most tax-efficient structure.
The rest of this post explains why each answer works and gives you the numbers to make the call with confidence.
What each entity actually is
LLC. A state-level entity separating personal assets from business liabilities. By default, single-member LLCs are taxed as sole proprietorships and multi-member LLCs as partnerships, with profits flowing through to personal returns. You can also elect S-Corp or C-Corp treatment without changing the legal entity. No board, no required annual meetings, no stock; ownership lives in a flexible operating agreement where profit splits do not have to match ownership percentages. Not designed for institutional capital: most VCs will not invest in an LLC.
C-Corp. A separate legal entity that pays its own taxes. Shareholders, a board, officers, formal governance. Supports multiple stock classes, ISOs and NSOs, and 200 plus years of Delaware case law. The trade-off is double taxation: 21% federal corporate tax on profits, then personal tax again on distributed dividends. Plus the admin: board meetings, minutes, resolutions, Form 1120, and state compliance.
S-Corp. Not a separate entity type. It is a tax election (Form 2553) on an existing LLC or corporation. Profit distributed beyond your reasonable salary is not subject to self-employment tax (15.3%). The restrictions are sharp: all shareholders must be US citizens or permanent residents, maximum 100 shareholders, one class of stock, and you must pay yourself a reasonable salary before taking distributions. The IRS watches that closely.
The tax math, side by side
Entity choice is fundamentally a tax decision. Liability protection is roughly equivalent; governance matters but is secondary. The table below compares approximate federal tax burden at three profit levels. Assumptions: single filer, sole owner, no other income, S-Corp salary at 40% of profit, state tax excluded.
| Profit | LLC (default pass-through) | S-Corp election | C-Corp (full distribution) |
|---|---|---|---|
| $100,000 | |||
| Federal income tax | ~$17,400 | ~$17,400 | $21,000 corp + ~$11,850 div |
| SE / payroll tax | ~$15,300 | ~$6,120 | n/a |
| QBI deduction benefit | ~−$3,480 | ~−$2,640 | n/a |
| Total federal tax | ~$29,220 | ~$20,880 | ~$32,850 |
| Effective rate | ~29.2% | ~20.9% | ~32.9% |
| $250,000 | |||
| Federal income tax | ~$52,000 | ~$52,000 | $52,500 corp + ~$29,625 div |
| SE / payroll tax | ~$35,100 | ~$15,300 | n/a |
| QBI deduction benefit | ~−$8,100 | ~−$6,600 | n/a |
| Total federal tax | ~$79,000 | ~$60,700 | ~$82,125 |
| Effective rate | ~31.6% | ~24.3% | ~32.9% |
| $500,000 | |||
| Federal income tax | ~$120,000 | ~$120,000 | $105,000 corp + ~$59,250 div |
| SE / payroll tax | ~$47,500 | ~$24,200 | n/a |
| QBI deduction benefit | $0 (phased out) | $0 (phased out) | n/a |
| NIIT | n/a | n/a | ~$7,410 |
| Total federal tax | ~$167,500 | ~$144,200 | ~$171,660 |
| Effective rate | ~33.5% | ~28.8% | ~34.3% |
Three things to pull out of that table:
The S-Corp wins on tax efficiency at every profit level for owner-operators. The savings come from splitting income into salary (subject to payroll tax) and distributions (not), so SE tax applies only to your reasonable salary instead of all profit. The trade-off is a payroll requirement and IRS scrutiny on what counts as reasonable, typically defended as at least 40% to 60% of total compensation.
The LLC is the most tax-expensive option in pure dollar terms because every dollar of profit attracts SE tax up to the Social Security wage base. It is also the cheapest and simplest to maintain, which is why it remains a sensible default for low-profit or pre-revenue businesses.
The C-Corp's 32% to 34% headline rate assumes you distribute all profits. Retain earnings in the business and you only pay the 21% corporate rate, with the second layer kicking in on distribution. That makes C-Corps competitive for high-reinvestment businesses and uncompetitive for owner-operators who want the cash.
The QBI deduction (Section 199A) gives LLC and S-Corp owners up to 20% off qualified business income, phasing out above $197,300 single / $394,600 married, and phasing out entirely for specified service businesses (consulting, law, accounting, health) above those thresholds.
Model your exact numbers with the tax calculator →
Fundraising compatibility
If you plan to raise from institutional investors, the decision is largely made for you. Almost every US venture fund invests exclusively in Delaware C-Corps. The reasons are structural, not arbitrary.
VCs need preferred stock with specific rights (liquidation preferences, anti-dilution, board seats). C-Corps support multiple classes natively; S-Corps are capped at one class by law; LLCs issue "profits interests" or "membership units" that are messier in every term-sheet template. Only C-Corps can issue ISOs. Many VC funds have tax-exempt LPs (endowments, pension funds), and LLC pass-through income creates Unrelated Business Taxable Income that most fund agreements prohibit. And the entire venture-financing stack (SAFEs, convertible notes, Series A docs) is built around C-Corp mechanics.
Technically yes, you can raise as an LLC. Some angels and revenue-based lenders will do it. Past the seed stage, that path narrows fast. Starting as an LLC and converting later when a priced round materialises is a legitimate middle path: typically $3,000 to $10,000 in legal fees, 2 to 4 weeks, and possible tax consequences on the conversion. Cheaper than overhead-running a C-Corp for years before you actually need one.
Compare Delaware C-Corp and Wyoming LLC side-by-side for the nine-metric view.
What it actually costs to maintain
Formation fees get all the attention; recurring annual cost is what compounds.
| Annual cost | Wyoming LLC (solo founder) | Delaware C-Corp (solo founder) | S-Corp on Wyoming LLC |
|---|---|---|---|
| State annual report / franchise tax | $60 | $400 | $60 |
| Registered agent (if out-of-state) | $125 | $125 | $125 |
| Home-state registration (e.g., California) | varies | $800 plus | varies |
| Tax prep | $200 to $500 (Schedule C) | $500 to $1,500 (Form 1120) plus $200 to $500 personal | $500 to $1,200 (Form 1120-S plus K-1) |
| Payroll service | n/a | n/a | $300 to $600 |
| Realistic total | $385 to $685 | $2,025 to $3,325 | $985 to $1,985 |
California charges $800 minimum franchise tax regardless of formation state, plus LLC gross-receipts fees up to $11,790 at $5M plus in revenue. If you live or operate there, that bill arrives whether you formed in Wyoming or not. Delaware is popular for C-Corps because of its legal infrastructure, not cost savings: you pay Delaware fees plus the requirements of wherever you actually operate. Wyoming is the cheapest baseline for LLCs and S-Corps with minimal compliance. For a state-by-state walk, see the where to incorporate guide.
How to decide, by situation
Raising US venture capital, or planning to. Delaware C-Corp. The overhead matches what investors expect. If fundraising is 2 plus years out and uncertain, LLC now with later conversion is fine.
Profitable owner-operator, US persons only. S-Corp election on an LLC. You save 15.3% SE tax on every dollar above your reasonable salary, up to the Social Security wage base. At $150,000 profit that is roughly $11,000 per year. File Form 2553 by March 15 of the tax year, or wait until next year.
Early stage, pre-revenue, or undecided. Start with an LLC. Cheapest to set up and maintain. Convert to a C-Corp or add an S-Corp election later. Wyoming is typically the most cost-effective state; Delaware if you suspect you might raise.
Non-US founder. Different decision tree entirely. S-Corp is closed to you, a US LLC may carry US tax obligations plus a Form 5472 filing, and you may not need a US entity at all. See the non-US founders' guide.
If your situation does not slot cleanly into one of those, run the quiz. It covers tax residence, revenue model, team size, state of operations, and growth plans, which is most of the inputs that actually move the answer.
Common mistakes
Forming a C-Corp when you do not need investors. A lifestyle business or small product company with no fundraising plans pays double taxation, higher admin, and bigger tax-prep bills for no benefit. An LLC, with or without S-Corp election, is almost always the right call.
Missing the March 15 S-Corp election deadline. Founders who discover the savings in October usually wait until the following year, or file a late election with reasonable cause. If you are earning $100,000 plus in LLC profit, run the math early.
Incorporating in Delaware when you live in a single state. Without VC plans, you pay Delaware fees, a registered agent, and you still register as a foreign entity in your home state. Your home state is usually simpler and cheaper.
Ignoring the S-Corp reasonable-salary rule. Paying yourself $10,000 and taking $140,000 in distributions invites IRS reclassification, back payroll taxes, penalties, and interest. The salary needs to be defensibly close to market rate.
Forgetting the California franchise tax. Living, operating, or hiring in California means $800 minimum franchise tax regardless of formation state. Founders who form in Wyoming or Delaware to "avoid California taxes" find this out the following year.
FAQ
Can I convert my LLC to a C-Corp later?
Yes. LLC-to-C-Corp conversions are routine, typically 2 to 4 weeks and $3,000 to $10,000 in legal fees. Bylaws drafted, stock issued, assets transferred, and possible tax consequences on the conversion. Most founders do this when they are actively raising their first priced round.
What's the difference between an S-Corp and an LLC taxed as an S-Corp?
Legally they are different entities (one is a corporation, the other an LLC). Federally, both are taxed under Subchapter S. The practical differences are state-level (some states do not recognize the S election for LLCs) and in underlying operating flexibility. An LLC taxed as an S-Corp gives you pass-through taxation with the flexibility of an LLC operating agreement.
When is a lawyer needed to form an LLC or corporation?
For a simple single-member LLC, generally not. Online formation services handle it for $0 to $500 plus state filing fees. For a C-Corp that will raise capital, issue co-founder equity, or set up a stock option plan, a startup attorney is the norm. Certificate of incorporation, bylaws, stockholders' agreement, and IP assignments need to be right from day one.
Can a non-US person own an LLC or C-Corp?
LLCs and C-Corps, yes. S-Corps, no, this is a hard IRS rule. Foreign-owned single-member LLCs must also file Form 5472 plus a pro-forma Form 1120 annually, with $25,000 per-form penalties for non-filing. See the non-US founders' guide.
When is a C-Corp more tax-efficient than an S-Corp?
When you reinvest all profits back into the business (paying only 21% corporate with no distribution tax), when you qualify for the Qualified Small Business Stock exclusion under Section 1202 (excluding up to $10M or 10x your basis in capital gains on a 5 plus year hold), or when you need multiple stock classes for investors. QSBS is a meaningful long-term benefit available only to C-Corp shareholders.
Ready to find your entity? Take the free 5-minute quiz → or compare any two entity types side-by-side.
Sources for every rate, exemption, and substance requirement in the engine are tracked in the project's public DATA_SOURCES.md. General information only, not legal, tax, or financial advice. Laws and regulations change. For complex situations, consult a qualified lawyer or accountant.