The certificate of incorporation runs to two pages. Mine arrived as a PDF with a state seal in the corner, a file number, and a timestamp accurate to the second. It cost less than a decent dinner. It contains no description of what the company does, no mention of the product, and none of the names of the people who had spent four months arguing about the product.

It is the least interesting document the company will ever produce and the most expensive one to get wrong.

Everything downstream is shaped by it. Who is allowed to own a piece of the company. Whether you can issue options to the engineer you want to hire in eight months. What happens to your money if there is ever an exit. Whether an investor’s lawyer spends twenty minutes on your paperwork or three weeks. You feel none of this on the day you file. You feel it two years later, usually in a week when you have no time.

The question that decides it for most teams

There are three structures in the conversation: the limited liability company, the S corporation, and the C corporation. For a lot of founding teams one of those three is eliminated before the tax argument even starts, and almost nobody finds out early enough.

An S corporation cannot have a nonresident alien as a shareholder. That is not a guideline. Section 1361(b)(1)(C) of the Internal Revenue Code makes it a condition of the election, and a single share held by an ineligible person terminates S status for the entire company. Residency here is a tax classification, not a passport and not a visa. You qualify by holding a green card or by meeting the substantial presence test, which is a day-count formula. Living abroad while holding US citizenship is fine. Living abroad on a foreign passport is not.

If any of your co-founders sits outside the United States without a green card, the S corporation is gone. There is a trust structure that allows a nonresident to be a beneficiary of an entity holding S corporation stock, but it is an estate planning instrument, not a founding structure, and no early-stage company should be building one.

Two further S corporation constraints matter even for an all-US team. The cap is one hundred shareholders, which sounds generous until you have run two SAFE rounds. And there can be only one class of stock, which means you cannot issue preferred shares. Institutional investors buy preferred shares. That one line quietly makes the S corporation incompatible with nearly every venture round that has ever been done.

So for most teams the choice is not three ways. It is two.

LLC or C corporation, and the question underneath it

The limited liability company is simpler and cheaper in almost every respect. There is no share structure, which removes the main variable that makes corporate formation expensive and fiddly. Profits pass through to the members and are taxed once. Annual maintenance is lighter. If you are building a business you intend to fund out of its own revenue, and you plan to take money out of it as distributions, the LLC is not a compromise. It is the correct answer, and a lot of quietly profitable software companies are structured this way on purpose.

The C corporation is what institutional investors buy, and not out of preference. Many venture funds have tax-exempt limited partners, university endowments and foundations among them, who face real problems taking pass-through income from an operating business. Others have foreign limited partners with their own reasons for staying out of partnerships. Beyond that, employee stock options are a corporate instrument. If you intend to compete for engineers using equity, you need a corporation and a stock plan.

The question underneath the entity choice is not legal at all. It is this: how do you plan to get paid?

If the answer is distributions from profit, you want the LLC. If the answer is the sale of stock, whether to an acquirer or in a secondary, you want the corporation, and you want it early.

Where, and why the answer is boring

Delaware remains the default for corporations, and the reasons are structural rather than sentimental. It has a dedicated business court with judges who hear only corporate matters and no juries, which has produced a deep and predictable body of case law. Investor lawyers know it, which means your documents do not need to be explained to anyone. Choosing it removes a conversation rather than winning one.

It is not free. A Delaware corporation pays annual franchise tax that varies with share structure, and founders who authorize ten million shares and then use the wrong calculation method receive a bill that looks like a typo. There is a second method that produces a far smaller number for a normal early-stage company, and it is worth knowing that before the first invoice arrives rather than after. For an LLC the equivalent is a flat annual amount and the paperwork is lighter.

The argument that changed in July 2025

There is a provision in the tax code, Section 1202, that lets an individual exclude capital gain on the sale of qualified small business stock. It applies to stock in a domestic C corporation. Not an LLC, not a partnership. Stock.

For fifteen years the rule was straightforward and slow. Hold the stock more than five years, exclude 100 percent of the gain, capped at the greater of ten million dollars or ten times your basis, and only if the company’s aggregate gross assets never exceeded fifty million dollars at issuance.

That changed on 4 July 2025. For stock issued after that date the exclusion became tiered. Three years gets you 50 percent. Four years gets you 75 percent. Five years still gets you 100 percent. The per-issuer cap rose from ten million to fifteen million, indexed for inflation from 2027. The gross asset ceiling rose from fifty million to seventy-five million, also indexed. Stock issued on or before 4 July 2025 stays under the old rules, and you generally cannot reset the clock by exchanging old stock for new.

The three-year tier is the part that changes founder behavior. The old regime asked you to bet on a five-year horizon before any relief appeared at all, which for a lot of people was longer than they could honestly forecast. Partial relief arriving at year three makes the corporate structure worth choosing at formation rather than at the first term sheet.

Two cautions. This is stock, so an LLC gets nothing, and converting an LLC into a corporation later starts the holding period from the conversion, not from the day you had the idea. And every one of these conditions has to hold at issuance and afterward. It is worth an hour with a tax professional before you file anything rather than after.

Three ways this goes wrong

You form an LLC because it is cheap, then convert under time pressure. Conversion is possible and routine. It is also a taxable event in some configurations, it resets your employer identification number, it costs a few thousand dollars in legal fees, and it lands in the exact week you are trying to close a round. The saving at formation was a few hundred dollars.

You elect S corporation status on general advice and terminate it without noticing. This happens when an accountant optimizes for self-employment tax without asking where every shareholder is tax resident. The election does not fail loudly. It fails on a return, later, with interest attached.

You incorporate somewhere you do not operate and skip the second filing. Incorporating in one state and running the business from another usually requires registering as a foreign entity where you actually operate, with its own fees and its own annual reports. It is not optional, and it is easy to forget because nothing happens for a while.

None of this is advice about your situation and I am not qualified to give any. It is a description of the machinery. The point of describing it is that the machinery is knowable in an afternoon, while the cost of not knowing it shows up years later, priced in something other than money.

Choose the entity that matches how you plan to get paid, not how you plan to be described.

Tomorrow: the registered agent invoice, and what it costs to keep a company alive before it has sold anything.