Structure your business

Structure your business

Choosing the right business structure isn’t exciting, but it is foundational. It will affect how much you pay in taxes, how much personal liability you carry, how easily you can raise money, and how clean your cap table looks to future investors. Getting it wrong early can mean painful (and expensive) restructuring later. In this guide, we break down exactly what each structure means, how to choose the right one based on your goals, and the steps to get set up properly.

Step 1: Understand the Core Differences

Let’s break down the three most common structures for startups:

LLC (Limited Liability Company)

  • Pros: Easy to form, low maintenance, pass-through taxation (profits taxed once on your personal return), flexible management.
  • Cons: Not ideal if you’re raising venture capital. Investors usually prefer corporations due to share structures and tax treatment.

Use an LLC if: You are bootstrapping or consulting, want liability protection, and don’t plan to raise outside money in the near future.

S-Corporation (S-Corp)

  • Pros: Pass-through taxation, allows you to split income between salary and dividends (can save on self-employment taxes), some investor-friendliness.
  • Cons: Strict ownership rules (only U.S. citizens/residents, one class of stock), limited in fundraising.

Use an S-Corp if: You want to pay yourself a salary and take dividends while keeping taxes low and still operating with a more formal structure.

C-Corporation (C-Corp)

  • Pros: Ideal for startups planning to raise venture capital, allows multiple stock classes, unlimited shareholders, easy to grant stock options.
  • Cons: Double taxation (corporate tax + personal dividend tax), more paperwork and compliance.

Use a C-Corp if: You are planning to raise money from VCs, issue equity to employees, and want to scale fast.

Pro Tip: Most funded startups are incorporated as Delaware C-Corps because of Delaware’s predictable corporate laws and investor familiarity.

Step 2: Align Structure With Your Funding and Growth Goals

Ask yourself:

  • Do I plan to raise outside capital within the next 12-24 months?
  • Will I have co-founders, investors, or employees with equity?
  • Is this business going to be my full-time focus with plans to grow aggressively?

If yes, go straight to a Delaware C-Corp. It will save you a restructuring headache later.

If not, and you’re just validating an idea, consulting, or side-hustling, consider starting as an LLC. You can always convert later using services like Clerky or Gust Launch.

Step 3: Form the Entity

Here’s what you need to do once you’ve chosen a structure:

For LLCs or S-Corps:

  1. Choose a state: Usually your home state, unless you expect out-of-state operations.
  2. Name your business: Check availability using your Secretary of State’s business name search.
  3. File Articles of Organization (LLC) or Articles of Incorporation (S-Corp).
  4. Get an EIN from the IRS here.
  5. Draft an Operating Agreement (for LLC) or Corporate Bylaws (for S-Corp).
  6. Open a business bank account.

For Delaware C-Corps:

  1. Use a tool like Stripe Atlas, Firstbase, or Clerky to simplify everything.
  2. Issue founder shares using proper stock purchase agreements.
  3. File a Form SS-4 to get your EIN.
  4. File a “Form 2553” if electing S-Corp status (within 75 days of formation).

Step 4: Understand Tax Implications

  • LLC: Default pass-through, taxed once. You report profits/losses on your personal taxes.
  • S-Corp: Pass-through too, but can split income into salary and distributions. Salary is subject to payroll tax, distributions are not.
  • C-Corp: Pays corporate income tax (currently 21%), and dividends to shareholders are taxed again personally.

Tip: Always speak with a startup-savvy CPA. Pilot and Bench offer early-stage accounting services and entity formation advice.

Step 5: Maintain Compliance

Whichever structure you choose, you’ll need to:

  • File annual reports
  • Pay state fees
  • Keep clean financial records
  • Hold required board or member meetings (especially for corporations)

Failure to do so can put your liability protection at risk.

Summary Table

FeatureLLCS-CorpC-Corp (Delaware)
TaxationPass-throughPass-throughDouble taxation
VC-FriendlyNoLimitedYes
Share StructureNot applicableOne class onlyMultiple classes allowed
Ownership LimitsNoneUS residents only, less than100 pplUnlimited
MaintenanceLowModerateHigh
Best ForSolo / bootstrappedSmall team / tax efficiencyVC-funded startups

Final Thoughts

The structure you choose now will shape your business’s future flexibility. Don’t overcomplicate it, but do think a few steps ahead. I