What Legal Structure Do Most Startups Use: Complete 2025 Guide

What do 90% of venture-backed startups have in common? They did not just build a great product; they chose the right legal structure from day one.

If you are launching a startup, your legal entity might seem like background noise. A formality. Something you’ll “figure out later.” But that assumption can quietly sabotage your business before you even hit product–market fit.

On the flip side, the right legal foundation can give you tax efficiency, protect your personal finances, and position you for growth — whether that means bootstrapping or raising millions.

In this guide, we’ll break down the legal structures that startups are using in 2025 – what they mean, how they compare, and why most high-growth companies lean toward LLCs or Delaware C-Corps. You’ll also learn how to choose based on your goals, industry, and funding plans.

Let’s get into it, and make sure your foundation is built for scale, not just survival.

Why Legal Structure Matters from Day 1

Did you know that the legal structure of your startup is a decision that shapes how your business is taxed, how much liability you carry, and whether investors will take you seriously?

Here’s what’s actually on the line:

• Taxes: The structure you choose determines whether your profits are taxed once (like in an LLC) or twice (like in a C-Corp). It affects how you pay yourself, deduct expenses, and report to the IRS. Get it wrong, and you might overpay, or worse, trigger red flags that get you audited.
• Liability: Without the right entity in place, a single lawsuit or unpaid debt can hit your personal finances. Your house, car, savings, all fair game. LLCs and corporations create a protective barrier. Sole proprietorships do not.
• Fundraising: Are you planning to raise capital? Here’s a hard truth: most VCs and serious angels only invest in Delaware C-Corps. If you’re an LLC or a sole prop, they’ll either require you to convert, or pass altogether. Your structure signals whether you’re “fundable” from day one.
• Growth & exit strategy: Your legal setup affects how easily you can issue stock, bring on co-founders, grant equity, or sell the company down the line. Founders who plan to scale need a clean structure investors and acquirers won’t hesitate to audit.

Quick Overview of Legal Structure Types

Confused by all the acronyms? You are not alone.
Most first-time founders assume “LLC” or “Inc.” are just stylistic choices. But behind those titles are real legal frameworks, each with different rules, risks, and tax responsibilities.

Before we dive deep, here’s a breakdown of the most common legal entities you’ll come across as a founder.

1. Sole Proprietorship

Used by freelancers, solo consultants, side hustlers
Pros: zero setup cost, full control, simple taxes
Cons: no liability protection; your personal assets are fully exposed

Nearly 86.3% of non-employer businesses in the U.S. are sole proprietors, but very few ever scale beyond one person.

2. Partnership

Used by two or more founders starting something small
Pros: shared responsibility, pass-through taxes
Cons: partners are personally liable unless you form an LLP

If your co-founder can make a legal or financial decision that affects you, make sure your partnership is properly structured or it will get messy fast.

3. LLC (Limited Liability Company)

Used by bootstrapped startups, consultants, online businesses
Pros: personal liability protection, flexible tax options
Cons: less ideal for raising VC money, paperwork varies by state

35% of new businesses registered in the U.S. each year are LLCs, a popular starting point for founders who want legal protection and control without investor pressure.

4. C Corporation (C-Corp)

Used by high-growth startups, especially in tech and SaaS
Pros: strong liability protection, best for raising capital, easy to issue equity
Cons: double taxation, more paperwork and compliance

Did you know that, according to NVCA, over 90% of startups backed by Y Combinator and venture capital firms are Delaware C-Corps.

5. S Corporation (S-Corp)

Used by small businesses that want corporate protection + pass-through taxes
Pros: no double tax, ability to pay owner salary + dividends
Cons: strict eligibility limits (U.S. citizens only, one class of stock, etc.)

Best for businesses making solid profits but not planning to raise VC money.

6. LLP (Limited Liability Partnership)

Used by law firms, accounting firms, medical groups
Pros: shared management, liability protection per partner
Cons: often industry-specific and regulated by state laws

Not common for startups unless you’re building a services firm with licensed professionals.

Most Common Legal Structures Used by Startups (With Data)

So, what legal structures are startups actually using in the real world? Let’s skip the guesswork, here’s what the numbers say.

Funded Startups: C-Corps Dominate

If your startup goal involves raising capital, issuing equity, or eventually exiting via acquisition or IPO, there’s one clear favorite: Over 90% of venture-backed startups in the U.S. are structured as Delaware C-Corporations.

Why? Because C-Corps are clean, predictable, and optimized for scale:

• They allow multiple classes of stock (critical for equity deals)
• They make it easier to grant employee stock options
• They signal legitimacy to VCs and institutional investors

Bootstrapped Startups: LLCs Take the Lead

For early-stage founders running lean, LLCs are a go-to.

They offer:

• Personal liability protection
• Flexible tax treatment
• Fewer regulatory headaches

LLCs are especially common among: Tech consultants and service providers, ecommerce founders, coaches, creators, and SaaS builders not yet raising capital

Industry Trends: Structure by Sector

Comparison Table: Pros & Cons by Entity Type

This side-by-side table shows what each structure actually offers in terms of liability, taxes, fundraising, and complexity.

Whether you’re trying to stay lean, attract investors, or build something big from day one, this chart will help you match your legal structure to your business goals.

What Does This Table Actually Tell You?

• If you want simplicity and speed, go sole prop, but know you’re exposed.
• If you want flexibility with protection, an LLC gives you breathing room and room to grow.
• If you want to raise serious funding, your best bet is still a Delaware C-Corp , investors will expect it.
• S-Corps are great for profitable small businesses but can get tricky if you plan to issue stock or bring on non-U.S. shareholders.

Reminder: You can often start with one structure (like an LLC) and convert later if your business scales or pivots toward investment.

How to Choose the Best Structure for Your Startup

There’s no perfect legal structure, only the right one for where you’re going.

This decision is about choosing a legal setup that aligns with your goals, funding strategy, risk tolerance, and growth plans.

Here’s how to make that call without second-guessing yourself:

1. Are you planning to raise capital soon?

If you’re building a venture-scale startup and expect to pitch angels, VCs, or accelerators, just go with a Delaware C-Corp.
Investors are used to it. It’s clean, scalable, and structured for equity deals.

Go C-Corp because LLCs typically require conversion before funding and sole proprietorships will disqualify you from most investor conversations

2. Do you want liability protection from day one?

Every founder should want protection because even small businesses carry legal and financial risks.

LLCs, C-Corps, and S-Corps all offer limited liability, meaning your personal assets stay safe if your business is sued. Sole proprietorships and general partnerships don’t.

3. Are you bootstrapping and keeping it lean?

If you’re self-funded, not raising capital soon, and want to avoid unnecessary complexity, an LLC is your best friend.

You get liability protection, you pay taxes once (pass-through) and you stay flexible as you grow. Plus, if your trajectory changes and investors come knocking, you can always convert to a C-Corp later.

Go LLC now, convert later if needed

4. Are you building for a fast exit, acquisition, or IPO?

If you’re thinking long-term, and by long-term, we mean building something you could sell or take public, then start as you mean to scale.

C-Corp is the standard for issuing stock, attracting equity-based employees, and prepping for future M&A. Plus, C-Corps qualify for QSBS (Qualified Small Business Stock) — meaning you could avoid capital gains tax when you sell after 5 years.

5. Do you want maximum tax flexibility today?

LLCs offer pass-through taxation, and you can elect to be taxed as an S-Corp if it benefits you. S-Corps are a tax play for profitable small businesses, allowing you to split salary and distributions. C-Corps offer corporate deductions but are subject to double tax unless you use smart tax planning.

Tax Considerations for Each Structure

Here’s the truth no one tells first-time founders:
The wrong legal structure can quietly eat your profits not because your business failed, but because your tax setup did.

Every structure handles taxes differently. Some pass income through directly to you. Others get taxed twice. Some give you room to optimize how you pay yourself. Others lock you into rules you can’t work around.

Let’s unpack the core tax implications of each option:

Which Is Best Tax-Wise?

Pro tip: Talk to a startup-savvy tax advisor before you file. The IRS won’t care that your intentions were good if you end up with a structure that costs you thousands unnecessarily.

Investor & Fundraising Implications

If you want investors, your legal structure can make or break the deal.

Here’s the reality: Most VCs and serious investors only back Delaware C-Corps. Why? Because C-Corps make it easy to issue shares, manage ownership, and protect everyone involved.

If you’re an LLC or sole proprietor, investors will often ask you to convert before writing a check, and that means delays, extra costs, and headaches.

Even angels want clean setups. No one wants complicated tax or legal puzzles that come with LLCs or sole props.

In short: If fundraising is on your radar, start with a Delaware C-Corp. It saves time, money, and keeps investors comfortable.

How to Set Up Your Chosen Structure (Step-by-Step)

Setting up your startup’s legal structure sounds like a legal marathon — but it doesn’t have to be. Here’s how to do it without drowning in paperwork:

1. Choose Your Structure: Already decided? Great. If not: Bootstrapping? Start with an LLC. Planning to raise? Go Delaware C-Corp

2. Pick Your State: Delaware is the go-to for C-Corps (investor-friendly and startup-tested). LLCs can usually file in your home state.

 3. File Your Formation Docs

• LLC: Articles of Organization
• C-Corp: Articles of Incorporation + stock structure
• You will pay a small fee (usually $50–$300) depending on the state.

4. Get Your EIN: This is your business’s social security number. Free from the IRS. Do it online in minutes.

5. Open a Business Bank Account: Never mix personal and business finances. Your EIN and formation docs will be enough to open one.

6. Handle Ongoing Compliance: File annual reports. Pay franchise taxes (especially if you’re in Delaware). Maintain clean records for taxes and fundraising

Real Startup Examples

Are you still wondering which structure wins in the real world? Let’s look at how well-known startups did it, and why it worked.

• Stripe: Started as a Delaware C-Corp, raised billions, scaled globally, and became a VC darling. Investors didn’t blink.
• Mailchimp: Ran as an LLC for years. Bootstrapped, profitable, and sold for $12B. Proof that if you’re not raising VC, LLCs can win.
• Figma: C-Corp from day one. Raised venture capital, scaled fast, and was acquired by Adobe for $20B. Clean structure made the deal smooth.
•  ConvertKit: Started as an LLC, bootstrapped to $30M+ ARR without taking outside money. Kept it lean and fully founder-owned.

FAQs

1. Can I change my legal structure later?

Yes, and many founders do. You can convert from an LLC to a C-Corp (especially before raising capital). Just know it takes time, money, and clean books.

2. What if I start as a sole proprietor?

That’s fine for testing an idea but once you earn real revenue or sign clients, upgrade to an LLC or C-Corp to protect yourself.

3. What’s best for raising VC money?

Delaware C-Corp. No debate. It’s the gold standard for investor-backed startups.

4. LLC or C-Corp, which is better for tech startups?

If you’re building a product, raising funds, or planning an exit, C-Corp wins.
If you’re solo, bootstrapped, and service-based, LLC gives you more control and fewer headaches.

Conclusion: Choose Smart Now, Scale Easier Later

Picking your startup’s legal structure is a strategy. The right structure can lower your taxes, protect your personal assets, and unlock real growth. The wrong one? It can block investors, create legal messes, and cost you way more down the line.

Here’s the quick recap:

• Just testing the waters? Sole prop or LLC.
• Building for profit, not outside funding? LLC or S-Corp.
• Going big and raising capital? Delaware C-Corp. No question.

Whatever path you’re on, structure smart, because clean foundations lead to clean growth.

Still figuring out your startup idea? Learn how to develop it here