Handbook
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Business Fundamentals
Incorporating Your Startup: LLC vs C-Corp vs Delaware
The legal structure you choose has lasting implications. Here's how to make the right decision for your startup.
Choosing your corporate structure is one of the first real decisions you’ll make as a founder. Get it wrong and you’ll face expensive restructuring later—or worse, tax complications and investor headaches.
Here’s what you need to know.
The Main Options
LLC (Limited Liability Company)
What it is: A flexible structure that provides liability protection without corporate formalities.
Pros:
•
Simple to set up and maintain
•
Pass-through taxation (no corporate tax)
•
Flexible profit distribution
•
Less paperwork than corporations
Cons:
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Hard to raise VC (investors can’t hold LLC interests easily)
•
Difficult to issue equity to employees
•
Different members can have different tax obligations
•
Not suitable for going public
Best for:
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Lifestyle businesses
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Consulting firms
•
Real estate
•
Businesses that won’t raise institutional money
C-Corporation
What it is: A separate legal entity with shareholders, directors, and officers.
Pros:
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Standard structure for VC investment
•
Can issue stock options to employees
•
Can go public
•
Clear ownership structure
•
Established legal precedents
Cons:
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Double taxation (corporate tax + dividend tax)
•
More formalities (board meetings, minutes, etc.)
•
More expensive to set up and maintain
•
State-specific regulations
Best for:
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Startups seeking VC funding
•
Companies planning to offer equity compensation
•
Businesses that may go public or be acquired
S-Corporation
What it is: A C-Corp that elects special tax treatment for pass-through taxation.
Pros:
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Pass-through taxation
•
Limited liability
•
Can issue some equity
Cons:
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Restrictions on shareholders (max 100, US residents only)
•
Can’t have VC investors (they’re often entities)
•
One class of stock only
•
Must be domestic
Best for:
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Small businesses wanting pass-through taxation
•
Not suitable for most tech startups seeking investment
Why Delaware
Most VC-backed startups incorporate as Delaware C-Corps. Here’s why:
Business-Friendly Law
Delaware’s Court of Chancery specializes in business disputes:
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Judges (not juries) decide cases
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Extensive case law provides predictability
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Fast resolution of disputes
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Sophisticated understanding of corporate issues
Investor Expectations
VCs expect Delaware corporations:
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Standard documents and terms
•
Familiar structure
•
Easy due diligence
•
No need to learn state-specific quirks
Flexibility
Delaware law allows:
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Flexible charter provisions
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Multiple classes of stock
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Director-friendly protections
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Stockholder agreements
No Local Presence Required
You can incorporate in Delaware without:
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Having an office there
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Conducting business there
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Having employees there
You just need a registered agent (costs ~$50-100/year).
When Not to Choose Delaware
Delaware isn’t always necessary:
You’re not raising VC: If you’re bootstrapping or raising from angels only, incorporating in your home state is simpler and cheaper.
Local regulations matter: Some industries (banking, insurance) have state-specific requirements.
You want simplicity: For small businesses, local LLCs are easier to manage.
The Process
For a Delaware C-Corp
1.
Choose a name – Check availability on Delaware’s Division of Corporations website
2.
Get a registered agent – Services like Stripe Atlas, Clerky, or Northwest Registered Agent
3.
File Certificate of Incorporation – ~$90 Delaware fee + registered agent fees
4.
Create bylaws – Standard document governing corporate operations
5.
Issue stock – File with Delaware (franchise tax obligations begin)
6.
Get an EIN – Federal tax ID from IRS (free, online)
7.
Open a bank account – Need EIN and incorporation docs
8.
Register in your home state – “Foreign qualification” if operating in another state
Cost: $500-2,000 depending on whether you use a service or lawyer
Time: 1-2 weeks
Using Formation Services
Services that handle incorporation:
Stripe Atlas – $500 one-time, includes bank account, legal docs, Stripe integration
Clerky – Popular with YC companies, ~$800
Firstbase – $399+, includes registered agent
Lawyer – $1,500-5,000, but provides customization and advice
For standard Delaware C-Corp, formation services are fine. For unusual situations, consult a lawyer.
Common Mistakes
Waiting Too Long
Incorporate before you:
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Have customers
•
Sign contracts
•
Accept investment
•
Hire anyone
Operating as an unincorporated business creates liability and tax complications.
Wrong Structure for Your Goals
Starting as an LLC when you plan to raise VC means restructuring later. Know your path and choose accordingly.
Ignoring State Registration
If you operate in a state other than Delaware, you need to “foreign qualify”—register to do business there. Ignoring this creates legal and tax problems.
DIY Legal Docs
Using random templates from the internet for your charter, bylaws, or shareholder agreements. These documents matter. Use established templates (Clerky, Stripe Atlas) or get a lawyer.
Messy Cap Table from Day One
Issue stock properly from the start. Handshake agreements about equity create expensive problems later.
After Incorporating
Annual Requirements
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Delaware franchise tax (minimum ~$225/year)
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Annual report filing
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Home state filings if foreign qualified
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Federal and state tax returns
Set Up Properly
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Board resolution for bank account
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Initial stock issuance
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83(b) elections for founders if applicable
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Employment agreements
Key Takeaways
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VC-track startups: Delaware C-Corp
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Bootstrapped/lifestyle: LLC in your home state
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Delaware is standard because of investor expectations and business-friendly courts
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Use formation services (Stripe Atlas, Clerky) for standard incorporations
•
Incorporate before you have customers, contracts, or investment
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Register in states where you operate
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Use proper legal templates—don’t DIY corporate documents
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