# Choosing an entity in practice

> A decision table by goal — raise VC, bootstrap, consult, side project, real estate — and why Northwind is a Delaware C corporation.

Source: https://lopifi.com/learn/which-entity-should-i-choose
Part of: Lopifi — US GAAP books on autopilot, checked by a CPA (https://lopifi.com)

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**Should my startup be an LLC, S corp or C corp?** A decision table by goal — raise VC, bootstrap, consult, side project, real estate — and why Northwind is a Delaware C corporation.

Start from what you want the company to do, not from the tax rate. The table is a starting point for the conversation with a lawyer and a CPA, not a substitute for it.

| Goal | Usually | Why |
| --- | --- | --- |
| Raise venture capital | Delaware C corporation | Preferred stock, options, ISOs, QSBS, investors' own taxes |
| Bootstrap and distribute profit | LLC, perhaps with an S election once profitable | One layer of tax; S status saves self-employment tax above a reasonable salary |
| Solo consultant | Single-member LLC; S election when profit justifies payroll | Liability shield, owner's own return |
| Side project, low risk | Sole proprietorship, or a single-member LLC | Nothing to form; the QBI deduction applies either way |
| Real estate | LLC taxed as a partnership | Depreciation and losses reach the owners; no second tax on sale proceeds paid out |
| Mission-first company raising money | Delaware public benefit corporation | A corporation, with the mission as a board duty |
| Charity | Nonprofit corporation seeking 501(c)(3) status | Tax exemption; no owners |

By goal.

## Northwind's choice

**Northwind — Why a tool reseller is a Delaware C corporation.** Northwind's two founders formed a Delaware C corporation with 10,000,000 authorized shares and issued 8,000,000, 4,000,000 each, for $60,000. They plan a $250,000 SAFE, which converts into preferred stock at a priced round — so an LLC would have had to convert, and an S election would end at the round. The cost is real: 21% on any profit, a second tax on dividends like JE-14's $500, Delaware's franchise tax, and its home state's filings as a foreign corporation. The benefit is a company investors can buy and whose stock can be QSBS.

**Delaware C corporation**
- Pro: What investors buy.
- Pro: ISOs and QSBS.
- Pro: Losses carry forward.
- Con: Double tax on distributions.
- Con: Franchise tax and two states' filings.
- Best for: Raising venture capital or granting options.

**LLC**
- Pro: One layer of tax.
- Pro: Losses pass through.
- Pro: Can elect S or C status later.
- Con: Converting before a round.
- Con: Self-employment tax for active members.
- Best for: Bootstrapped businesses, real estate, holding companies.

**S corporation (election)**
- Pro: One layer of tax.
- Pro: No self-employment tax on profit above the salary.
- Con: Payroll and a reasonable salary.
- Con: No preferred stock or fund investors.
- Best for: Profitable owner-operators with US individual owners.

The three choices most founders actually weigh.

1. **Decide.** Choose the entity and the state of formation, with a lawyer if you will raise money.
2. **Form it.** File the certificate of incorporation or formation, and appoint a registered agent.
3. **Get the numbers.** Get the EIN, then open a bank account in the company's name — never mix it with your own.
4. **Issue the equity.** Issue founder stock or record members' capital; file any 83(b) elections within 30 days.
5. **Register and elect.** Register in the state where you operate, and file any S or check-the-box election on time.

From decision to a working company.

**Exercise — Which return does it file?.** Pick the federal income tax return each business files for its year. Two rows file the same return for the same reason, and one row's name says LLC but it files as a corporation. Type it in the workbook at https://lopifi.com/playground.

*[Figure: cap table]*

Northwind's cap table at formation: two founders, one class. Fully diluted shares.

> **Raising money: Delaware C corporation. Not raising: an LLC, with an S election once the profit pays for payroll.**

Next, keeping it in good standing: the [Compliance & tax track](https://lopifi.com/md/learn/compliance). Raising money and the cap table: the [Cap tables & raising track](https://lopifi.com/md/learn/equity). Setting up the rest of the back office: [the entity and its numbers](https://lopifi.com/md/learn/ein-and-state-registrations) and [separating business and personal money](https://lopifi.com/md/learn/separate-business-and-personal-money).

## Where this lesson's rules come from

- [SBA, Choose a business structure](https://www.sba.gov/business-guide/launch-your-business/choose-business-structure) — Choose a business structure — the SBA's overview of the options (agency)
- [SBA, Choose a business structure — Sole proprietorship, Corporation](https://www.sba.gov/business-guide/launch-your-business/choose-business-structure) — Personal liability without an entity, and why corporations raise money more easily (agency)
- [26 U.S.C. §1361(b)(1), (c)(4)](https://www.law.cornell.edu/uscode/text/26/1361) — Small business corporation: no more than 100 shareholders, eligible shareholders only, one class of stock (statute)
- [26 U.S.C. §1202(c)(1), (d)(1), (i)(1)](https://www.law.cornell.edu/uscode/text/26/1202) — Qualified small business stock is stock in a C corporation — and converted property starts the clock at conversion (statute)
- [26 U.S.C. §199A(a), (i), as amended by Pub. L. 119-21 §70105](https://www.law.cornell.edu/uscode/text/26/199A) — The qualified business income deduction — 20%, made permanent, with a $400 minimum (statute)

## Read further

- https://lopifi.com/md/startups/startup-compliance-calendar
- https://lopifi.com/md/startups/how-to-account-for-safes
- https://lopifi.com/md/accounting/qsbs
- https://lopifi.com/md/accounting/safe
- https://lopifi.com/md/accounting/cap-table
- https://lopifi.com/md/accounting/form-1120
- https://lopifi.com/md/accounting/delaware-franchise-tax

- **Track:** [Entity types](https://lopifi.com/md/learn/entities)
- **Lesson:** Lesson 9 of 9 — 8 min
- **Terms taught:** [C corporation](https://lopifi.com/md/glossary/c-corporation), [Limited liability company](https://lopifi.com/md/glossary/limited-liability-company), [S corporation](https://lopifi.com/md/glossary/s-corporation), [Sole proprietorship](https://lopifi.com/md/glossary/sole-proprietorship), [83(b) election](https://lopifi.com/md/glossary/83-b-election), [Commingling](https://lopifi.com/md/glossary/commingling)
- **Previous:** [Parents, subsidiaries and groups, Entities · Lesson 8](https://lopifi.com/md/learn/parent-and-subsidiary-structures)
- **Next:** [Why the books exist, Accounting · Lesson 1](https://lopifi.com/md/learn/why-the-books-exist)
- **The course:** https://lopifi.com/md/learn