Delaware C-Corp or LLC Which One Do You Choose?
The startup founder’s journey is full of adventures, opportunities, and even self-realization. Each step along the journey, founders will face countless challenges that impact the company in the long run. Choosing the right entity format is one of these challenges.
Out of many different formats of business entities, Delaware C-Corp and LLC are among the most popular. They are very different and have distinguishable benefits that lead to different outcomes. Most startups form Delaware C-corps to make fundraising easier. For your comparison, here is a summary on Delaware C-Corps and LLCs:
What you need to know about LLCs
LLCs Limited Liability Companies are very easy to form.
Tax indications for LLCs - Pass-through entities
LLCs are pass-through taxation entities, meaning all the profits and losses will pass to you as the owner on an individual tax level your company LLC will not be taxed on the profit and losses. In other words, you and your company will be taxed only once for any profit and losses you made.
What you need to know about Delaware C-Corps
Delaware C-Corps is a corporation that is formed in the state of Delaware. The structure of the C-corp and the location of formation (Delaware) are set up to support the hyper-growth companies. Almost all investors will not invest in your startup unless you are a Delaware C-corp.
Tax indications for Delaware C-Corps
All the C-corps are double taxation entities. This means that any profits will be taxed on the company and individual level. Unlike LLCs, you will pay tax on the profits for your c-corp and pay taxes on salary and wages received from the C-corp.
Delaware C-Corps are better suited for raising venture capital
A few reasons why investors prefer Delaware C-corps:
· Easy to sell and transfer ownership
· Easy to scale
When it is time to issue equity to employees, you can do that with C-corp easily.
Can you change from LLC to Delaware C-Corp
Yes, however, it is very time consuming and costly. It is better to pick the suitable entity type from the beginning.
Choosing between LLC and Delaware C-Corp
Choosing the right entity type to fit your overall goal. If you plan to grow and scale a startup and raise venture capital, forming as a Delaware C-Corp is the best option. You will be much more attractive to investors and have fewer tax implications when raising funds.
Takeaway
Despite the double taxation, Delaware C-Corp is the top entity type for founders to incorporate. Delaware C-Corps are highly scalable and easy to sell and transfer ownership, therefore they are more appealing to investors.
