About the Author
Lauren Shelton
Lauren is the Tax Manager at Fine Point Consulting and has over 15 years of accounting experience.
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Lauren Shelton
If you ask five advisors which entity your startup should be, you'll get five confident answers. They might all be right. The answer depends almost entirely on where your company is headed, not where it is today.
The good news: it usually comes down to a handful of drivers. Once you know which ones apply to you, the choice gets a lot clearer.
Here is the short version. If you plan to raise venture capital, you are almost certainly going to be a Delaware C corp. If you are building a profitable business you intend to own for years, an LLC taxed as an S corp often wins. If you are not sure yet, a plain LLC keeps your options open.
Now, the drivers behind that.
This is the question that settles the debate for most venture-backed startups, including nearly every biotech and medical device company we work with. Institutional investors, VCs, and especially funds with tax-exempt limited partners, overwhelmingly require a Delaware C corporation. Pass-through entities create tax headaches for their LPs, preferred stock structures do not map cleanly onto LLCs, and standard deal documents all assume a Ccorp.
If a priced round is in your future, forming as a C corp from day one saves you legal fees, deal friction, and a last-minute scramble. It also starts a very valuable clock.
Qualified Small Business Stock (Section 1202) can let founders and early investors exclude millions of dollars of gain from federal tax when they sell. Only C corp stock qualifies.
For stock issued after July 4, 2025, the rules got significantly better. The per-issuer exclusion cap increased to $15 million, the company-size threshold rose to $75 million in gross assets at issuance, and partial exclusions now kick in at a three-year holding period instead of the old all-or-nothing five-year cliff.
For biotech and medical startups, this is enormous. Long development timelines mean founders often hold their stock well past the five-year mark anyway, and acquisition is the most common exit. A founder who structures correctly can walk away from a sale with a dramatically smaller tax bill.
Two things to know before you move on. First, the holding period starts when you receive the stock, so converting from an LLC to a C corp later delays your clock. Second, not every business qualifies. Certain service businesses are excluded. Talk to your tax advisor about this early, not when you are staring at a term sheet.
If you are running a profitable business and taking the income home, think consulting practices, agencies, profitable e-commerce, medical practices, the S corp election is usually about one thing: payroll tax.
In a default LLC, all of your profit is generally subject to self-employment tax (15.3% on the first chunk, plus Medicare beyond that). With an S corp election, you pay yourself a reasonable salary subject to payroll tax, and take the remaining profit as distributions, which are not. On meaningful profits, that is real money every year.
The catch is the word "reasonable." The IRS pays close attention to S Corp owners who pay themselves token salaries. Your salary needs to hold up against what you would pay someone else to do your job.
The S corp also comes with structural restrictions: one class of stock, a 100-shareholder cap, and shareholders must generally be U.S. individuals. Those restrictions are exactly why S corps and venture capital do not mix.
Early-stage companies lose money. That is often the plan. The question is who gets to use those losses.
In an LLC or S corp, losses pass through to the owners, who may be able to deduct them against other income (subject to basis, at-risk, and passive activity limits). In a C corp, losses stay inside the company as net operating loss carryforwards. They are only useful when the company itself turns profitable, and they can be limited under Section 382 if ownership shifts through funding rounds.
For a bootstrapped founder with outside income, pass-through losses can be genuinely valuable. For a VC-backed biotech burning investor capital, the benefit is mostly irrelevant. The investors generally cannot use the losses efficiently anyway, and the C carp's other advantages far outweigh this one.
The classic argument against C corps is double taxation. The corporation pays tax on profits at 21%, and shareholders pay tax again on dividends. It is a real cost, but it matters far less than most founders assume.
Most startups do not pay dividends. Profits get reinvested, and the founder's payoff typically comes through a stock sale, where QSBS may eliminate the federal tax entirely. Double taxation is a meaningful concern for mature, cash-distributing businesses. For a growth-stage company, it is usually a footnote.
If stock options are part of your hiring plan, the C corp is the cleanest vehicle. Option plans, 409A valuations, and the equity mechanics your employees and lawyers expect are all built around corporate stock.
Granting equity in an LLC is possible but considerably messier. Profits interests are powerful tools, but they tend to confuse employees and complicate payroll. S corps can issue options, but the single-class-of-stock rule limits what you can design.
A few common patterns we see:
Lauren is the Tax Manager at Fine Point Consulting and has over 15 years of accounting experience.
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