Choosing the right business structure is one of the most important decisions for your startup. This comprehensive guide breaks down everything you need to know.
8 minute read • Updated January 2024
Pass-through taxation: Profits and losses "pass through" to your personal tax return.
Self-employment taxes: You'll pay 15.3% SE tax on profits above $400.
Tax flexibility: Can elect S-Corp or C-Corp taxation if beneficial.
Example: $100k profit = ~$15,300 in SE taxes + income tax
Double taxation: Corporation pays taxes, then shareholders pay on dividends.
No SE taxes: Owners who work receive W-2 wages, avoiding SE tax.
Tax benefits: Can deduct health insurance and some fringe benefits.
Example: $100k salary = ~$7,650 in payroll taxes (split with company)
Converting from LLC to C-Corp later can be complex and expensive ($5,000-$15,000+ in legal fees). If you're planning to raise VC funding within 2 years, starting as a C-Corp is usually more cost-effective.
Chose LLC for her 3-person design agency. Simple taxes, no plans for outside funding, and profits distributed annually. Saves ~$3,000/year in accounting fees vs C-Corp.
Two co-founders building a SaaS platform. Incorporated as Delaware C-Corp from day one, raised $2M seed round 18 months later. Clean cap table enabled smooth fundraising.
Assess your funding plans for the next 2-3 years
Consider your team size and equity plans
Calculate the tax implications for your situation
Consult with a tax professional for personalized advice
Our business formation experts can help you choose the right structure and handle all the paperwork.