Entity comparison
LLC vs C-Corp: Which Is Better in 2026?
The decision changes by use case. We break down tax, fundraising, cost, and the §1202 QSBS exclusion that swings the math for venture-backed founders.
The side-by-side
| LLC (default pass-through) | C-Corp | |
|---|---|---|
| Formation cost (Wyoming/Delaware) | $100 / $110 | $110-$200 |
| Annual maintenance | $62-$300 | $300+ (DE franchise tax scales with shares) |
| Federal income tax | Pass-through to owner (10-37%) | 21% flat corporate + dividend tax on distribution |
| QBI deduction (Section 199A) | Up to 20% deduction | Not eligible |
| Self-employment tax | 15.3% on net profit | None on dividends; payroll FICA on salary |
| Number of owners | Unlimited | Unlimited |
| Foreign owners allowed? | Yes | Yes |
| Issue multiple classes of stock | Membership classes, complex | Common + preferred, straightforward |
| Stock options for employees | Profits interests, NQSOs | ISOs + NQSOs (much cleaner) |
| Section 1202 QSBS exclusion | ❌ Not eligible | ✅ Up to $10M tax-free on exit |
| VC investability | Most VCs decline | Standard |
| Conversion to other type | Convert to C-Corp easy | Convert to LLC complex (taxable event) |
| Operating complexity | Operating agreement only | Bylaws + board minutes + meetings |
| Privacy | High in WY/NM (members not public) | Officers/directors usually public |
The decision in 4 questions
1. Are you raising venture capital?
If yes → Delaware C-Corp. VCs require it because of tax-exempt LP constraints, ISO eligibility, and QSBS. No serious institutional investor will fund an LLC.
2. Will profits stay inside the company for 5+ years before distribution?
If yes → C-Corp may win. Retained corporate earnings are taxed only at 21% (vs the owner's personal rate, which can hit 37%). This rewards businesses building long-term equity inside the corporate shell.
3. Will you take most profits as personal income each year?
If yes → LLC wins. Pass-through taxation with the 20% QBI deduction beats C-Corp double taxation for nearly every income level under $1M.
4. Do you want to issue stock options to employees?
If yes (with ISO tax treatment) → C-Corp. LLC profits interests are workable but awkward, and employees don't get the same tax-deferral benefits.
The hybrid most founders end up using
The dominant path for ambitious founders:
- Form an LLC on day 1 in Wyoming or Delaware ($100, fast).
- Validate the business for 6-24 months under pass-through taxation (cheaper for early losses).
- When fundraising or scaling, do a statutory conversion to Delaware C-Corp.
- If you converted before issuing significant stock, you may still claim §1202 QSBS on your founder stock (5-year hold counts from conversion).
Cost difference over 5 years
| Wyoming LLC | Delaware C-Corp (minimum) | |
|---|---|---|
| Year 1 | $162 | $540 (state $110 + DE franchise $400-$450 + $90 annual report) |
| Years 2-5 each | $112 | $450+ (DE annual report + franchise tax min) |
| 5-year total | $610 | $2,340+ |
Delaware C-Corp franchise tax can run $400-$300,000/yr depending on share count and value. Most small C-Corps stay near the $400 minimum.
S-Corp election: the LLC tax hack
An LLC can elect S-Corp tax treatment (Form 2553), which lets you take some profits as a "reasonable salary" (subject to FICA) and the rest as distributions (no SE tax). This often saves $5k-$20k/yr once net profit exceeds ~$60k. Critically, S-Corp election does NOT give you C-Corp benefits — no QSBS, no ISOs, still LLC legally. Run the S-Corp savings calculator to see your breakeven.
Related tools and pages
- LLC Tax Calculator — federal + state + SE tax with QBI deduction
- S-Corp Savings Calculator — when the S-Corp election pays off
- Best state to form an LLC — 2026 rankings
- Delaware LLC guide — for the LLC-then-flip path
Frequently asked questions
Is LLC or C-Corp better for taxes?
For most owners under $1M revenue, LLC is better — its pass-through taxation means profits are taxed once at the owner level (after the 20% QBI deduction). C-Corp profits are double-taxed: 21% corporate rate + dividend tax (15-23.8%) when distributed. C-Corp only wins when you retain profits for years inside the company (for reinvestment) or when you want certain employee fringe benefits.
Why do VCs require C-Corp instead of LLC?
Three reasons: (1) Tax-exempt LPs (university endowments, pension funds) can't hold LLC interests without triggering UBIT tax; (2) ISOs (incentive stock options for employees) only exist for C-Corps; (3) Qualified Small Business Stock (QSBS) §1202 exclusion only applies to C-Corp stock — a tax-free exit up to $10M is huge. If you want investor money, C-Corp is non-negotiable.
Can I convert an LLC to a C-Corp later?
Yes — it's called a "statutory conversion" or "LLC-to-C-Corp flip" and most YC-funded startups do it before Series A. Delaware allows direct statutory conversion. Other states may require a merger structure. Cost: $500-$3,000 in legal fees plus tax-basis carryover. Most founders form an LLC first to validate the business, then flip before raising.
What is the §1202 QSBS exclusion and why does it matter?
IRC §1202 lets founders and early employees of qualifying C-Corps exclude up to the greater of $10M or 10× their stock basis from federal capital gains tax — completely tax-free — if they hold the stock for 5+ years. This is the single biggest reason VCs want C-Corp. LLCs never qualify. For a $50M exit, this can save $2-3M per founder.
What is double taxation in a C-Corp exactly?
C-Corp earns $100k profit → pays 21% federal corporate tax ($21k) → distributes remaining $79k as dividend → owner pays 15-23.8% qualified dividend rate ($12-19k). Total tax ~36-40%, leaving ~$60-64k. An LLC with the same $100k profit: owner pays personal rates (10-37%) minus the 20% QBI deduction, typically netting $65-85k. The LLC wins for most owners.
Should I form an LLC and elect C-Corp tax treatment?
Almost never. An LLC with C-Corp tax election (Form 8832) gives you C-Corp double-taxation without the C-Corp benefits VCs want (you're still legally an LLC, so no QSBS, no ISOs, hard to issue investor-standard stock). If you want C-Corp taxation, form an actual Delaware C-Corp.