C Corp or LLC: which US company should you form?

The short answer

If you plan to raise money from angel investors or venture funds, give employees stock options, or apply to an accelerator, form a Delaware C Corporation. Investors expect it, their lawyers have documents ready for it, and converting later costs real money.

If you are building a business that earns its own way, sells to customers worldwide and needs a US entity mainly to get paid and look credible, a Delaware LLC is simpler and cheaper to keep.

How each one is taxed

A C Corp is a taxpayer in its own right. It pays US federal corporate tax on its profit, and shareholders pay tax again only when profit is paid out as dividends. A C Corp files a federal return every year, even with no revenue.

An LLC is a pass-through by default. A single-member LLC owned by a non-US person is treated as a "disregarded entity" for income tax but must still file an information return every year. A multi-member LLC is taxed as a partnership and files a partnership return, with each member reporting their share. Whether a non-US member owes US tax depends on whether the LLC has income effectively connected with a US trade or business, which is exactly the question to put to an accountant.

What it costs to keep

Delaware charges an LLC a flat annual tax of USD 300, due 1 June. A C Corp pays franchise tax plus a USD 50 annual report, due 1 March. A typical startup C Corp, filing under the assumed par value capital method, pays the USD 400 minimum, so about USD 450 a year in total.

Accounting costs follow the same pattern: an LLC with simple books is cheaper to look after than a corporation with shareholders, a board and a cap table.

A rule of thumb

Choose the C Corp if any of these is true. Otherwise the LLC is usually the better tool.

• You expect to raise from investors in the next two years.
• You want to give employees or advisers equity.
• You are applying to an accelerator or programme that asks for a Delaware C Corp.
• You may want the company to be bought one day by a US acquirer.

Can I switch later?

Yes. An LLC can convert to a C Corp, and founders do it when a first priced round arrives. It involves new documents, legal fees and possible tax consequences, so if you already know you will raise, start as a C Corp.