Choosing between a C-Corp and an LLC is one of the first and most important decisions for your AI business. The structure you choose affects your taxes, funding options, and compliance. In 2025, most AI founders still go with a Delaware C-Corp-but LLCs have their place too. Here’s how to decide.
Tax Code and Legal Reference
- IRC §11 – Corporate tax rules for C-Corporations
- IRC §1361 – Rules for S-Corporation elections
- IRC §7701 – Definitions for LLCs and business entities
- Form 8832 – Used to elect corporation status for an LLC
- Form 2553 – For S-Corp election (if eligible)
Key IRS and State Forms
- Form SS-4 – For EIN
- Form 1120 – Corporate tax return (C-Corp)
- Form 1065 – Partnership tax return (for multi-member LLC)
- Form 8832/2553 – For tax elections
- Delaware Franchise Tax – Paid annually by both C-Corps and LLCs
Example: Comparing Structures
Example:
- NeuroNova AI formed as a C-Corp in Delaware and raised $1.2M in seed funding. Investors preferred the C-Corp for easy equity issuance.
- PixelMind AI chose an LLC for bootstrapping. No investors, flexible profit-sharing, and pass-through taxes. In year 2, they switched to a C-Corp using Form 8832 to raise Series A.
Step-by-Step: How to Choose
- Are You Raising Money?
– Choose C-Corp – preferred by VCs and angels - Bootstrapping or Solo Founder?
– Choose LLC – lower cost, less paperwork - Need Stock Options for Employees?
– C-Corp works better for 83(b) elections and cap tables - Avoiding Double Tax?
– LLCs have pass-through tax unless elected otherwise - Want to Convert Later?
– You can start as LLC and switch to C-Corp via Form 8832 - Planning International Ownership?
– C-Corp avoids S-Corp restrictions and allows foreign owners - Need Simplicity?
– LLCs require fewer formalities than C-Corps
Conclusion
For VC-backed AI startups, Delaware C-Corp is the clear winner. If you’re bootstrapping or just testing an idea, an LLC offers flexibility. Understand your growth plan before choosing-and don’t forget to plan your taxes ahead.
Call to Action
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Disclaimer
This blog is for information only. Consult a licensed professional for advice tailored to your business.
Anshul Goyal is a U.S. Certified Public Accountant, IRS Enrolled Agent, and Indian Chartered Accountant. He advises AI founders and startups on entity choice, compliance, and cross-border tax planning.
FAQs – Entity Structure for AI Founders
1. Is C-Corp better for AI startups?
Yes, especially if you plan to raise venture capital.
2. Can I switch from LLC to C-Corp later?
Yes. Use IRS Form 8832 to change the tax status.
3. Can non-U.S. citizens own a U.S. LLC or C-Corp?
Yes. But foreign owners can’t be part of an S-Corp.
4. What’s the tax rate for C-Corp in 2025?
21% flat federal rate, plus state taxes (if any).
5. Do LLCs pay self-employment tax?
Yes, profits are generally subject to self-employment tax unless elected otherwise.
About Our CPA
Anshul Goyal, CPA, EA, FCA is a licensed U.S. CPA and IRS-authorized tax representative. He helps Indian and international founders launch and scale AI businesses in the U.S. with full legal and tax compliance.