LLC vs C-Corp: Which US Entity Should Your Startup Choose?
The LLC-vs-C-Corp choice shapes taxes, fundraising and exit for years. Here's the honest trade-off for founders and small businesses.
7 min read · 2 February 2026
The tax difference is bigger than founders think
An LLC is pass-through by default: profits flow to the owners and are taxed on their personal return, avoiding entity-level tax. A C-Corp pays 21% federal tax on profits, then shareholders pay tax again on dividends — the 'double taxation' problem.
For bootstrapped, profitable companies distributing cash to owners, an LLC almost always wins on tax. For loss-making startups planning to raise venture capital, the C-Corp story flips.
Why VCs demand Delaware C-Corps
Institutional investors prefer C-Corps because they can hold preferred stock, use QSBS to shelter gains, and rely on well-tested Delaware corporate law. Most term sheets require conversion before closing.
If you know you'll raise a priced round in the next 12–18 months, incorporate as a Delaware C-Corp on day one. Late conversions cost legal fees and can trigger tax events.
Self-employment tax on LLC profits
Active LLC members pay 15.3% self-employment tax on their share of profits, on top of federal and state income tax. Electing S-Corp taxation lets owners pay themselves a reasonable salary and take remaining profits as distributions (no SE tax) — often saving 5–10% of profit.
S-Corp elections work best once profit exceeds roughly $80,000/year; below that, payroll administration eats the saving.