How does a Delaware C-Corp compare to an LLC?

Only Delaware C-Corporations are designed for high-growth startups that need the ability to scale, issue equity to employees, raise money from angel investors or VCs, and have a successful exit one day. While LLCs can provide some short-term savings for their owners, the expense and headache of converting to a Delaware C-Corporation down the line far outweigh any immediate gains. We at Gust Launch cannot stress enough how important it is for serious founders to incorporate as a Delaware C-Corporation from the beginning.

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Delaware C-Corporation Limited Liability Company (LLC)
Recommended for Founders needing maximum growth potential, liability protection, and the ability to attract investors. Best for startups that plan to raise money, distribute equity to employees, and either sell or IPO within 5-10 years. Owners who primarily want pass-through taxation and liability protection. Best for companies that plan to stay small to mid-size and startups that will not require outside investment.
Best for founders optimizing for Growth, long-term savings Short-term savings
Corporate ownership Shareholders Members
Limited liability protection
Unlimited number of owners
Intellectual Property (IP) protection
Required by investors
Designed to easily distribute ownership (stock) to attract investors, advisors, and employees
Structural flexibility More standardized -- Built around best practices well-understood by investors, like ownership that is represented by stock, governance by a Board, and officers to handle the day-to-day. Extremely flexible -- Very few restrictions around governance structure, voting rights, etc. This can cause lengthy due diligence work on the behalf of the investor during fundraising.
Taxation Corporate taxes -- The corporation is taxed on its net income, and shareholders are personally taxed on any dividends received and on capital gains when they sell their stock. Since almost all startups reinvest revenue back into the company for at least the first few years, there are generally no profits to tax at either level. Pass-through taxation -- Owners pay personal income tax on income generated from the business. This means owners of LLCs operating at a loss can reduce their taxable net income.
Pass-through tax advantage C-corps can elect pass-through status through the subchapter S Election. Best for initially founder-funded startups1. Inherent to LLCs.
Qualified Small Business Stock (QSBS) tax credit In the event of an exit, eligible shareholders are not taxed on the first $10 million of capital gains2. Not eligible.

1 For more information on the advantages (and disadvantages) of the S Election, visit https://gust.com/launch/blog/s-corporation-llc-startup-tax-savings

2 For more information on QSBS and eligibility requirements, visit https://gust.com/launch/blog/s-corporation-llc-startup-tax-savings

Already an LLC? Although we don’t do LLC to DE C-Corp conversions, we’ve worked closely with many founders of LLCs to create a new standalone Delaware C-Corp with Gust Launch. We always recommend founders work with their lawyers to properly transfer their assets and liabilities (if any) from their LLC to the new C-Corp. Before ultimately deciding the best option for your business, consult your tax and legal representatives.

Additional Resources:

Daniel DeWolf Member / Chair, Technology Practice; Co-Chair, Venture Capital & Emerging Companies Practice Mintz Levin
Incorporating as a C-Corporation in Delaware is the gold standard for high growth startups. It provides limited liability, ease of use, ease of setup, the ability to issue stock options, and tax benefits upon sale for many qualified small businesses.

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