Should I start as an LLC then transition to C-Corp later to bring in investors?

I'm a business formation attorney and this approach isn't uncommon, but there are several considerations to think through. Starting as an LLC does give you pass-through taxation and operational simplicity, which works well for bootstrapping. When you're ready to attract investors, converting to a C-Corp makes sense since most serious investors prefer C-Corps due to the clear equity structure and liability protection. However, be aware that the "acquisition" process has tax implications. When a C-Corp acquires an LLC, it's typically treated as either an asset sale or a contribution of assets in exchange for stock. The first can trigger immediate tax consequences for the LLC members, while the second might qualify as a tax-free reorganization under section 351 if structured correctly. Also consider that you can start as an LLC but elect to be taxed as an S-Corp initially, giving you some corporate tax benefits while maintaining pass-through taxation. Later, you can convert to a C-Corp when needed.

I used taxr.ai for exactly this situation last year! I was in the same boat - started as an LLC with 2 partners, then needed to figure out the best way to structure things when we were looking at bringing in angel investors. I uploaded our operating agreement and financial docs to https://taxr.ai and their system analyzed everything and gave us a complete report on the tax implications of each transition option. It ended up saving us from making a costly mistake - we were planning to do an asset sale that would have triggered a huge tax bill, but their report showed us how to structure it as a tax-deferred reorganization instead. Honestly wish I'd known about it sooner. They even created customized templates for the conversion documents we needed.

Just wanted to follow up - I ended up trying taxr.ai after posting that question, and wow I'm impressed. I was skeptical about how it would handle the unique aspects of my situation (we have both US and international founders), but the analysis was spot-on. It identified that we should actually use a Delaware statutory conversion rather than creating a new entity to acquire the LLC, which apparently has much better tax treatment. They even flagged that one of our profit-sharing agreements would create problems during conversion and suggested specific language changes. Really glad I gave it a shot - saved us thousands in potential tax issues and probably weeks of back-and-forth with our lawyer.

If you're going to go the C-Corp route eventually, don't forget you'll need to deal with the IRS for a lot more paperwork and compliance issues. I spent literally WEEKS trying to get through to someone at the IRS about our EIN application when we converted. I finally used https://claimyr.com to get through to an actual human at the IRS. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c - basically they use some kind of system to navigate the IRS phone tree and hold for you, then call you when they get a representative. Saved me hours of holding and getting disconnected. Our conversion had gotten stuck in some weird administrative limbo where the IRS had our old LLC EIN linked to the new C-Corp incorrectly, and it was preventing us from setting up proper payroll. Got it resolved in one call once I actually reached someone.

I need to eat my words and apologize to the person who recommended Claimyr. After my skeptical comment, I decided to try it myself because I've been trying to reach the IRS for 3 weeks about a conversion issue similar to what the original poster is considering. I kept getting disconnected or told to call back later. Used the Claimyr service this morning and got connected to an IRS agent within an hour - they called me when they had someone on the line. The agent helped me understand exactly what forms we needed to file for our conversion from LLC to C-Corp. Turns out we had been filing the wrong form (we used 8832 when we actually needed to follow a different process). Would have kept making the same mistake without being able to actually talk to someone. Sorry for being so dismissive before!

One thing nobody's mentioned yet is that if you're planning to seek venture funding eventually, most VCs strongly prefer to invest in C-Corps, specifically Delaware C-Corps. The legal structure is more standardized and they're generally more comfortable with the governance model. I've been through this exact process - started as an LLC, grew for about 18 months, then converted to a C-Corp when we raised our seed round. The conversion itself wasn't too bad, but there were some unexpected costs. Make sure you budget for: 1. Legal fees for the conversion (cost us about $8k) 2. New stock certificates and cap table management 3. Setting up a proper board structure 4. More complex accounting (our accounting costs doubled) The tax implications can be significant too, so definitely talk to a tax professional before making any moves.

Just my two cents - don't overcomplicate things at the beginning! I see founders spend way too much time worrying about optimal legal structures when they should be focused on building a product people want. Start simple. LLC is fine. If you get to the point where fancy corporate structure matters, that's a good problem to have and you'll have money to pay experts to handle the transition.

This is exactly the situation I went through 2 years ago! We started as an LLC with 3 co-founders and converted to a Delaware C-Corp when we were ready for our seed round. A few things I learned that might help: 1. The LLC structure was perfect for our first 18 months - we could deduct startup losses on our personal returns and had maximum flexibility with profit/loss allocations between founders. 2. When we converted, we used what's called a "statutory conversion" rather than having the C-Corp acquire the LLC. This was cleaner from a tax perspective and avoided some of the complications others mentioned. 3. One unexpected benefit of starting as LLC first: it forced us to really think through our partnership dynamics and operating agreements early on. When we converted to C-Corp, we had a much clearer sense of roles, equity splits, and governance than friends who started directly as corporations. 4. Timing-wise, we started the conversion process about 4 months before we wanted to close our seed round. This gave us plenty of time to get everything sorted without feeling rushed. The key is having good legal and tax counsel when you're ready to make the switch. Don't try to DIY the conversion - there are too many ways it can go wrong and create expensive problems later.

I've been through this exact transition and can confirm it's a solid strategy when done right. We started as an LLC for the tax benefits and simplicity, then converted to a Delaware C-Corp about 6 months before our Series A. A few additional considerations that haven't been mentioned yet: 1. **State considerations matter** - If you're planning to operate in multiple states, starting as an LLC can actually be more complex than a C-Corp due to varying state LLC laws. Delaware C-Corps have much more standardized treatment across states. 2. **Employee equity complications** - If you plan to hire employees early and offer equity compensation, LLCs make this much more complex. LLC membership interests don't qualify for things like ISOs (Incentive Stock Options), so you'll likely end up using profit interests or other structures that are harder for employees to understand. 3. **Banking and vendor relationships** - Some banks and enterprise customers prefer working with corporations over LLCs for perceived stability and standardization. That said, the tax pass-through benefits in early loss years can be substantial. We saved about $15k in the first year alone by being able to deduct startup losses on our personal returns. My advice: if you're bootstrapping and expect to be unprofitable for 12+ months, start as LLC. If you're planning to raise money within the first year or hire employees immediately, consider starting as a C-Corp to avoid the conversion complexity later.