Most LLC-vs-C-Corp advice is wrong because it assumes you already know which question you're asking. Half the content out there tells you "LLC for tax flexibility" without checking whether you'll ever raise money. The other half tells you "Delaware C-Corp because VCs require it" without checking whether you're actually going to take VC money. Both are giving you answers to questions you didn't ask.
Here's the decision tree that actually works.
Start with two questions, not ten
The right entity depends on exactly two questions:
- Do you intend to raise outside money in the next 24 months?
- Do you intend to have outside owners — employees with stock, advisors with equity, co-founders with vesting?
If both answers are no, you probably want an LLC. If either is yes, you almost certainly want a C-Corp. Most of the other advice is downstream of those two questions.
When LLC is right
You should form an LLC if:
- You're building a service business, agency, real estate operation, or anything where you'll always be the operator
- Your revenue model is "I sell hours, products, or services and keep the money"
- You don't plan to take investor capital
- You don't plan to give equity to anyone outside the founding team
- Pass-through tax treatment actually matters to your cash flow
LLCs are easy to form, cheap to maintain, and let you take distributions without corporate double-taxation. State filing fee in most states is $50-$200. Annual reporting is light. Single-member LLCs still get most of the legal protection a corporation gives you.
The catch: when you want to raise institutional money or grant equity to early employees, you have to convert to a C-Corp. The conversion costs $3,000-$8,000 in legal fees and can trigger tax events depending on the LLC's accumulated value. Convert early and it's manageable. Convert late and it's painful.
When C-Corp is right
You should form a C-Corp if:
- You intend to raise money from any investor (friends and family, angels, VCs, equity crowdfunding)
- You plan to give equity to anyone outside the founding team
- You want the tax advantages of QSBS (Qualified Small Business Stock exempts up to $10M of gains if held 5+ years, requires C-Corp from day one)
- You're building toward an acquisition or IPO
C-Corp is the entity investors expect. Standardized equity instruments (common stock, preferred stock, SAFEs, convertible notes) all assume C-Corp structure. Trying to raise into an LLC requires custom paperwork every time, which most investors won't tolerate.
The catch: double taxation, higher state filing fees, more annual paperwork, and the 83(b) election clock.
The Delaware question
Default advice is "incorporate in Delaware." For a venture-track founder raising institutional money, that's correct. Delaware has the most predictable corporate law, the most experienced judges, and the most familiar paperwork for investors.
But Delaware costs more. Annual franchise tax starts at $175 and can climb past $400 for most startups. State filing fees are higher. You need a registered agent in Delaware, which adds another $100-$300/year.
If you're raising institutional money, those costs are noise. If you're bootstrapping or raising small friends-and-family money, those costs are real.
Alternative: incorporate in your home state. Lower fees, simpler paperwork, no registered agent required if you're physically there. Downside is some larger investors will require a Delaware conversion before they invest, which costs $3,000-$8,000 and a few weeks of legal work.
There's a third option: Montana C-Corp. No franchise tax. $70 formation fee. Investor-grade legal protections under the same federal corporate law. This is the bet TokenTempo is built on. We won't pretend Montana is the only answer. Delaware is the default for a reason. But the math is worth running.
The five-year cost of choosing wrong
LLC when you should have been C-Corp: You bootstrap for 18 months, hit traction, get an angel offer for $250K. The angel won't invest into the LLC. You spend $5,000 and 6 weeks converting to C-Corp. The conversion triggers tax events on the LLC's accumulated value. You also lose the 5-year QSBS clock you would have had if you'd been a C-Corp from day one.
Total cost of choosing wrong: $5,000 plus 6 weeks of delay plus potentially $50K-$200K in foregone QSBS tax savings at exit.
C-Corp when you should have been LLC: You spend $1,500 incorporating Delaware, pay $400/year in franchise tax, file corporate tax returns for 3 years while building a services business that never raises money.
Total cost: ~$3,000 in extra fees plus a few hours per year of unnecessary paperwork. Less catastrophic but still real.
The asymmetry matters. The cost of LLC-when-should-have-been-C-Corp is much higher than the reverse. When in doubt, lean C-Corp.
The 83(b) clock — the most-regretted founder mistake
If you go C-Corp, the day you receive your founding stock, a 30-day clock starts. You have 30 days to file a Section 83(b) election with the IRS, a one-page form that tells them you want to pay tax on the value of your stock TODAY (when it's worth almost nothing) instead of as it vests over the next four years (when it's worth a lot more).
Miss the 30-day window and you can owe six figures in tax on stock you can't sell yet. This is the single most-regretted founder mistake we see, and it has no remedy. The IRS does not grant extensions.
If you're forming a C-Corp anywhere — Delaware, Montana, your home state — make 83(b) filing the day-7 task on your formation checklist. We've written more on the specific mechanics at tokentempo.co/education.
The decision flow
- Raising outside money in the next 24 months? → If yes, C-Corp. Done.
- Giving equity to anyone outside the founding team in the next 24 months? → If yes, C-Corp. Done.
- If both answers are no, are you sure? Talk to one founder one stage ahead of you. Ask them what they wish they'd known.
- Still confident neither will happen? LLC. Form in your home state. Keep it simple.
- If you went C-Corp file your 83(b) within 30 days. File via certified mail. Keep the receipt forever.
That's the decision tree. Most other advice is noise once you've answered the two questions at the top.
What to do this week
If you haven't formed yet:
- Answer the two questions honestly. Don't bullshit yourself about "maybe raising later."
- If C-Corp, research Delaware vs home state vs Montana. The decision isn't binary.
- Set your formation date with the 83(b) deadline in mind.
If you've already formed and you're realizing you picked wrong:
- LLC that should have been C-Corp: convert sooner rather than later. Cost grows with the LLC's value.
- C-Corp that should have been LLC: stay where you are. Cost of conversion isn't worth the savings unless you're certain you'll never raise.
The right entity is a five-year decision. The wrong entity is a five-year tax.