LLC vs C Corp for Bootstrapped Founders: Which to Pick

Verdict: For most bootstrapped software founders who are not raising venture capital, an LLC is the cheaper and simpler choice, with an S corp election once profit is high enough to justify payroll. Pick a Delaware C corp if you plan a priced round, want to issue options, or care about QSBS on an eventual sale. If you are unsure, start with a home-state LLC and convert when a term sheet appears.

Prices and rules below come from the IRS, state pages and the named law firm pages, checked on 8 Nov 2026.

TL;DR#

• LLC first for most bootstrappers. A single-member LLC's business income goes on your personal return and is subject to self-employment tax (IRS).
• A C corp pays 21% federal tax at the company level. Dividends can be taxed again on your return (IRS, IRS).
• An S corp election avoids the second layer. Form 2553 caps you at 100 shareholders, one class of stock and no nonresident aliens (IRS).
• QSBS is C corp only. Up to 100% exclusion after five years, plus 50% and 75% at three and four years for stock acquired after 4 July 2025 (Gibson Dunn).
• Delaware C corps pay a $50 annual report plus franchise tax ($175 minimum authorised shares, $400 assumed par). A Delaware LLC pays $400 (Delaware, Delaware).

Disclosure: ZeroRaised publishes this guide and is a launch site for bootstrapped products. We have no commercial relationship with any formation service, law firm or state mentioned here and earn nothing if you use them.

Not legal or tax advice: This is general information, not legal, tax or accounting advice. Entity choice depends on your state, income, investors and plans. Speak to a qualified lawyer or CPA before you file.

LLC vs C corp at a glance#

A single-member LLC is disregarded by default, so its activity lands on Form 1040. A multi-member LLC is a partnership unless it elects corporate treatment on Form 8832 (IRS).

A C corp is a separate taxpayer. It files Form 1120 and pays tax on its own income. You then leave profit in the company, take salary, or take dividends. Salary is deductible to the company but taxed to you and subject to payroll taxes. Dividends are not deductible, which creates the double tax.

Tax: pass-through vs double tax#

A simplified example: $200,000 profit, one US owner, a flat 24% federal rate applied to all owner income for simplicity (real brackets are progressive), federal tax only. State tax, payroll rates, QBI and credits are ignored. Do not use it as a tax plan.

A C corp is not automatically worse. Reinvest the remaining $158,000 and you defer the personal tax and keep the cash working. Pull it all out as a dividend and you pay both layers, usually the worst outcome.

An S corp sits in between. You must pay yourself reasonable compensation before taking non-wage distributions. The IRS says S corporations "must pay reasonable compensation to a shareholder-employee" before non-wage distributions may be made (IRS).

Our read: the election starts to make sense when profit is comfortably above a market salary for your work. Section 199A also lets many pass-through owners deduct up to 20% of qualified business income, and the One Big Beautiful Bill Act made that permanent (RSM).

The S corp election, and its limits#

An S corp is not a state entity. It is an LLC or corporation that filed Form 2553. The deadline is generally no more than 2 months and 15 days after the start of the tax year the election takes effect, or during the prior tax year (IRS Form 2553).

The limits are hard: no more than 100 shareholders, one class of stock, and only individuals, certain trusts and estates, and certain exempt organisations. Partnerships, corporations and nonresident aliens cannot be shareholders (IRS).

Take all the profit as a distribution and the IRS can reclassify it as wages, with the payroll tax bill that follows.

Our read: a solo founder with steady profit and no outside investors is often best served by an LLC plus an S corp election. Uneven profit splits or a foreign investor make a C corp cleaner.

QSBS: the C corp benefit worth understanding#

Qualified small business stock is the strongest tax argument for a C corp. Under Section 1202, non-corporate holders can exclude gain on qualifying stock, but the stock must be issued by a C corporation. Pass-through entities, including S corporations, are not eligible (Varnum).

The rules changed in 2025. For stock acquired after 4 July 2025, the One Big Beautiful Bill Act added a 50% exclusion at three years and 75% at four, with 100% still at five years. The lifetime cap rose from $10 million to $15 million, and the issuer's gross asset limit rose from $50 million to $75 million (Gibson Dunn).

An LLC interest is not QSBS. If a sale is plausible, be a C corp before the stock is issued; converting later does not create QSBS retroactively.

Our read: QSBS is a reason to choose a C corp early for a venture-scale company, not a reason to force every side project into one.

State costs: Delaware vs Wyoming vs home state#

States charge annual fees, and operating elsewhere may require a foreign registration.

Delaware's C corp franchise tax is not simply $400. The state lets you use the method with the lesser tax, but a large authorised share count can owe far more under the authorised shares method. Startups usually use assumed par value and treat $400 as the practical minimum.

A Delaware LLC now pays $400 a year, not $300. Both state sources say $400 (Delaware, Delaware Code).

Wyoming is cheaper: $100 to form and a $60 minimum annual report license tax. But it does not give you Delaware's corporate law, and operating elsewhere may still trigger that state's fees.

Non-US founders: the Form 5472 trap#

A US LLC with a single foreign owner is a "foreign-owned U.S. DE". It generally must file a pro forma Form 1120 with Form 5472 attached (IRS). The penalty for failing to file is $25,000. That filing is required even though the LLC generally has no US income tax return to file.

An S corp is not available if any shareholder is a nonresident alien (IRS). A C corp has no such restriction, which is why non-US founders who want US investors often use a Delaware C corp.

Y Combinator's FAQ says a company incorporated outside the United States, Canada, Singapore or the Cayman Islands needs a parent in one of those jurisdictions, and YC helps accepted companies incorporate (YC). Our read: that usually means a US parent, and many founders use a Delaware C corp.

When to convert an LLC to a C corp#

Convert when one of these becomes true:

• You have a term sheet. Investors usually expect a Delaware C corp with a standard cap table and option plan.
• You want to issue options. LLC profits interests work, but they are fiddlier and less familiar to hires.
• You want QSBS on future stock. The stock must be issued by a C corp while the company still meets the tests.

Do not wait until the week before closing. A conversion touches your operating agreement, cap table, contracts, bank accounts and tax filings. A common route is contributing the LLC's assets to a new corporation for stock, which can be tax-free if ownership proportions and control tests are met.

Decision table#

Scenario table#

How to file, step by step#

1. Pick your state. Start where you live and work. Choose Delaware only for an investor, accelerator or legal reason.
2. Check the name and appoint a registered agent. A Delaware entity needs a Delaware agent even if you live elsewhere.
3. File the formation document. Certificate of formation for an LLC, certificate of incorporation for a C corp. Our Stripe Atlas alternatives guide compares paid services.
4. Get an EIN. Apply directly with the IRS. It is free and issues immediately online for domestic entities with a US responsible party. The IRS warns that "you never have to pay a fee for an EIN" (IRS).
5. Adopt your documents. Operating agreement or bylaws, plus a share ledger for a C corp. Issue founder shares and file elections on time.
6. Open a business bank account. Keep money separate from day one. Our guide to the best business bank account for bootstrapped startups covers the options.
7. Calendar the deadlines. Annual report, franchise tax, LLC annual tax, estimated taxes and, if applicable, Form 5472.
8. File Form 2553 on time if you want S corp treatment, then revisit the decision once a year.

Mistakes to avoid#

• Forming a Delaware LLC "for investors". Investors usually want a C corp, not a Delaware LLC.
• Electing S corp and not running payroll. The election only works with reasonable compensation and payroll returns.
• Assuming an LLC means no self-employment tax. A single-member LLC's trade or business income is subject to it (IRS).
• Assuming a C corp always means double tax. The second layer only applies to dividends.
• Forgetting Form 5472. A foreign-owned single-member US LLC has an information return even with no US income tax return.

The bottom line#

Default to an LLC in your home state. Add an S corp election when profit justifies payroll. Move to a Delaware C corp when a priced round, an option pool, or QSBS planning makes the extra cost worth it. If you want to keep building without investors, read our guide to bootstrapping vs venture capital.

Frequently asked questions#

Is an LLC or C corp better for a bootstrapped startup?#

For most bootstrapped founders who are not raising, an LLC is simpler and cheaper, especially at home. If profit is high, an S corp election can cut self-employment tax. Choose a C corp for a priced round, options, or QSBS.

Do I need a Delaware C corp to raise venture capital?#

Not legally, but it is the standard. US venture investors generally expect a Delaware C corp with a clean cap table. YC's FAQ says a company incorporated outside the US, Canada, Singapore or the Cayman Islands needs a parent in one of those places.

Can I convert an LLC to a C corp later?#

Yes. Founders use a statutory conversion or contribute the LLC's assets to a new corporation for stock. It can be tax-free if done properly. Do it before a term sheet, with a lawyer and CPA.

Does an LLC pay less tax than a C corp?#

It depends on distributions. An LLC avoids corporate tax but the owner pays income tax and, for a single-member trade or business, self-employment tax. A C corp pays 21% federal tax, then shareholders can pay again on dividends.

Can a non-US founder own a US LLC or C corp?#

Yes, but the admin differs. A foreign-owned single-member US LLC generally must file a pro forma Form 1120 with Form 5472 attached, with a $25,000 penalty for failure. An S corp cannot have nonresident alien shareholders.

Launch when you are ready#

ZeroRaised is a launch directory for products built without institutional VC. Once your entity is set up, submit your product for free. For more guides on building without investors, join the ZeroRaised newsletter.

Sources#

All sources last checked 8 Nov 2026.

• IRS Publication 542
• IRS, S corporations
• IRS, Instructions for Form 2553
• IRS, Single member LLCs
• IRS, S corporation compensation
• IRS Topic no. 404
• IRS, Employer identification number
• IRS, Instructions for Form 5472
• Delaware franchise tax
• Delaware annual report and tax
• Delaware LLC/LP/GP tax
• Delaware Code, Section 18-1107
• Wyoming filing fee schedule
• Gibson Dunn, QSBS and the OBBBA
• Varnum, IRC Section 1202
• RSM, Permanent QBI deduction
• Y Combinator FAQ