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LLC or C corp: what changes when you raise
Why most investors ask for a corporation, when an LLC still makes sense, and what converting later involves.
Nia Calloway, Founder and attorney5 min read
An LLC is simple to form and flexible to run, which is why many companies start as one. The question is what happens when you raise money.
Why investors ask for a corporation
Venture funds usually can't or won't hold LLC interests, for tax reasons on their side. Preferred stock, option plans and the standard financing documents are all built for corporations.
When an LLC still makes sense
- You don't plan to raise outside equity
- The owners want profits passed straight through for tax
- You're holding real estate or another asset
- The company is a small partnership between operators
Converting later
Conversion is common and manageable, but it costs time and fees, and it can have tax consequences for the owners. If a raise is likely within a year or two, forming as a corporation now is often simpler.
This is general information, not legal or tax advice. Talk to your accountant as well before you choose.