Delaware LLC vs C-corp
Both give owners limited liability under the most developed business law in the US. The choice turns on how the profits are taxed, who will own the company, and how you plan to pay people in equity.
| LLC | C-Corp | |
| Formation fee | $110 | $109+ (varies with stock) |
| Annual state cost | $400 flat (June 1) | $400 APV min + $50 report (Mar 1) |
| Annual report | None | Required — lists directors and an officer |
| Federal tax | Pass-through by default (can elect S or C) | 21% at entity level, then tax on dividends |
| Delaware income tax | None on out-of-state income | 8.7%, only on Delaware-source income |
| VC funding | Almost never accepted | The standard |
| Equity compensation | Profits interests (more complex) | Options, RSUs, restricted stock + 83(b) |
| Governance | Whatever the operating agreement says | Board, officers, stockholder rules by statute |
Federal and state tax
An LLC's profit flows to its owners and is taxed once on their personal returns. Active owners usually pay self-employment tax on their share, which is why profitable LLCs often elect S-corp status and pay themselves a reasonable salary. A C-corp pays 21% federal tax on its profit, and owners pay tax again when profits are distributed as dividends. That double layer rarely matters for a startup reinvesting everything and running at a loss, and C-corp stock held more than five years may qualify for the federal small-business stock exclusion under IRC § 1202, a benefit LLC interests cannot get.
Losses cut the other way. Losses in an LLC can pass through to owners (subject to basis and at-risk limits); losses in a C-corp stay trapped in the company as carryforwards.
State costs
Both land near $400–$450 a year for a small company. For the corporation, watch the franchise-tax notice: Delaware computes it under the Authorized Shares method by default, which bills a company with 10 million authorized shares $85,165. Filing under the Assumed Par Value method usually drops it to the $400 minimum. See the APV guide. The LLC simply pays the flat $400 set by HB 400.
Why investors want the corporation
Venture funds invest in preferred stock with rights that Delaware corporate law and standard financing documents handle cleanly. Many funds also cannot hold LLC interests because pass-through income creates tax problems for their tax-exempt and foreign investors. If a priced round or SAFE is likely within the next year or two, start as a C-corp.
Converting later
Delaware allows a statutory conversion from LLC to corporation with one filing, and the federal tax result is usually tax-free if structured correctly. It still costs legal fees, resets equity documents, and can complicate the five-year holding period for § 1202, so decide once when you can.
Rule of thumb
Sources
- 8 Del. C. §§ 102, 266 (conversion), 502–503; 6 Del. C. § 18-1107; HB 400
- IRC §§ 11, 1202; Reg. § 301.7701-3 (entity classification)