Short answer: for founders who plan to raise venture capital, the Delaware C corporation fits the way venture money is invested. Investors buy preferred stock, fund documents assume a corporation, and the federal small business stock exclusion only applies to C corporation stock. An LLC can suit a business that will stay owner-run and distribute profits. That is a different company from the one this site writes about.
This is general information, not legal or tax advice.
Clause by clause
| Question | Delaware C corp | LLC |
|---|---|---|
| What investors buy | Preferred stock, or SAFEs that convert into it | Membership units, defined by the operating agreement |
| How profits are taxed | At the corporate level; stockholders taxed on dividends and sale gains | Passed through to members by default |
| Section 1202 (QSBS) | Available if the company qualifies | Not available while it is an LLC |
| Employee equity | Stock options, including incentive stock options | Profits interests or unit options under custom documents |
| Model financing documents | YC post-money SAFE, NVCA model documents | Custom drafting |
| Annual state cost in Delaware | Franchise tax plus a $50 annual report fee | Different regime; outside this site’s scope |
Investors buy preferred stock
A seed or Series A investor expects a liquidation preference, protective provisions and conversion rights. Those live in a corporation’s certificate of incorporation. The NVCA model documents, last revised in October 2025 for the charter, stock purchase agreement and investors’ rights agreement, are written for a corporation issuing preferred stock. Y Combinator’s post-money SAFE converts into preferred stock in a priced round.
An LLC can create preferred units by contract. Every investor’s counsel then has to read a bespoke operating agreement instead of a familiar charter.
Pass-through income and fund investors
LLC income passes through to members, who receive a share of taxable income whether or not cash is distributed. Venture funds raise money from pension funds, endowments and foreign investors, and pass-through business income can create tax and filing problems for those limited partners. That is the reason fund investors tend to ask for a corporation before they invest.
QSBS: the C corporation requirement
Section 1202 lets a non-corporate holder exclude gain on qualified small business stock. The statute, as amended in July 2025 and reproduced by Cornell’s Legal Information Institute, defines a qualified small business as a domestic C corporation and sets these terms for stock acquired after July 4, 2025:
- Exclusion of 50% after 3 years, 75% after 4 years and 100% after 5 years or more.
- A per-issuer cap of $15,000,000 (or 10 times basis, if greater), indexed for inflation after 2026.
- Aggregate gross assets of the corporation no more than $75,000,000 before and immediately after issuance.
Membership units in an LLC do not qualify. Under section 1202(i), stock received when an LLC later converts is treated as acquired on the date of the exchange, so the holding period starts then, not at formation.
Stock options for employees
Incentive stock options under Section 422 are options to buy stock of a corporation. A startup hiring engineers on equity can grant options under a board-approved plan and a 409A valuation. LLCs can offer profits interests, which work but need explaining to every candidate.
Delaware’s cost and its case law
The Delaware Division of Corporations’ annual report statistics say that nearly 70% of US-based IPOs in 2025 chose Delaware. For a seed-stage company, the cost is the annual franchise tax. The Division’s calculation page sets a $175 minimum under the Authorized Shares method and $400 under the Assumed Par Value Capital method, and the corporation pays the lesser. The walk-through in how to start a startup company shows why a startup with 10,000,000 authorized shares should file using the second method.
When the LLC question comes back
Founders sometimes start as an LLC to pass early losses through to their own returns, then convert before a priced round. Conversion is possible. It costs legal fees, starts the QSBS clock only at conversion, and puts a tax event and new documents in front of the company at the moment it is trying to close a round. If raising venture money is the plan, starting as a corporation avoids that work.
Also consider
- A C corporation formed in the founders’ home state, then reincorporated in Delaware before a priced round (a merger or conversion, with its own legal costs).
- A Delaware public benefit corporation, which is still a corporation that can issue preferred stock, with a stated public benefit in its charter.
- For a profitable business with no plan to raise outside equity, a conversation with a tax adviser about which structure fits.