Did you know that the type of company you invest in can significantly affect your investment returns — especially when it comes to taxes?

With Tax Day quickly approaching (though many startup investors end up filing extensions due to delayed K-1s), it’s the perfect time to revisit a crucial yet often overlooked aspect of startup investing: understanding how different entity types — specifically LLCs vs. C-Corporations — can influence your tax liabilities.

Investing isn’t just about potential gains. It’s also about optimizing after-tax returns. LLCs often bring added tax complexities, while C-Corporations can offer substantial tax benefits, including up to 100% tax-free gains on qualifying investments (via Section 1202 Qualified Small Business Stock or QSBS).

Moreover, C-Corporations can provide additional advantages, like more favorable tax write-offs if a company fails (Section 1244), or the possibility of deferring gains through rollover provisions (Section 1045). Knowing these nuances upfront can save you headaches — and potentially money — at tax time.

Free Tax Tracker: Did you know that you can track all your startup investments using the Kingscrowd Portfolio Tracker for free? This includes access to the portfolio Tax Center tool, which helps investors to keep track of which of their portfolio companies have failed or had exits.

Why Entity Type Matters for Investors: LLC vs. C Corp

Taxes in startup investing are nuanced and complex, extending beyond what this article can fully cover. (For a deeper dive, check out our guide on navigating taxes in startup investing.)

While many venture capital firms require startups to be structured as C Corporations — precisely because of the tax advantages and their compatibility with institutional funding — there is far more variety when investing in startups online via Reg CF. This makes it especially important for individual investors to understand how a company’s legal structure could influence both their tax reporting obligations and long-term after-tax returns.

At a high level, the choice between investing in an LLC vs. a Corporation may impact your taxes in several key ways:

  1. LLC Investments:
    1. May result in receiving a Schedule K-1 annually, introducing added tax complexity, added costs, and/or requiring tax deadline extensions.
    2. Even if the company has minimal or no activity, it may still need to pass along pro-rata gains or losses to limited partners.
    3. Some equity crowdfunding platforms and issuers have found ways to minimize or avoid K-1 distribution, but they can still occur — especially if investing via SPVs (e.g. on AngelList).
    4. Do not qualify for certain tax benefits, including Section 1202 (QSBS), 1244, or 1045.
  2. Corporation (C-Corp) Investments:
    1. Typically issue simpler Form 1099s, though this is uncommon for early-stage companies that reinvest profits rather than distribute dividends.
    2. Generally do not pass through losses or deductions to investors.
    3. May qualify for Section 1202 Qualified Small Business Stock (QSBS) benefits.

QSBS (Section 1202) Benefits

  • Allows investors in qualifying C-Corporations to exclude up to 100% of capital gains from federal taxes.
  • Applies to gains up to $10 million or 10X the investment, whichever is greater.

For most equity crowdfunding investors, this means gains on qualifying investments can be entirely tax-free—assuming the investment meets all QSBS requirements, including:

  • The company must be a domestic C-Corporation.
  • The investor must have acquired the shares at original issuance (not second-hand).
  • The shares must be held for at least 5 years.
  • The company’s gross assets must be under $50 million at the time of stock issuance.
  • The company must operate an active business (not an investment holding company or certain excluded industries).

If a qualifying company exits early (before 5 years), Section 1045 may allow tax-free rollover into another QSBS-eligible investment.

📌 Disclaimer: QSBS rules are complex and subject to change. Investors should consult a qualified tax advisor to understand how (if) these rules apply to their specific situation.

Additionally, investors should be aware of other tax-advantaged provisions that may apply in specific scenarios, such as:

  • Section 1045 – which may allow for tax-free rollover of QSBS gains into another qualifying small business stock.
  • Section 1244 – which can allow investors to write off up to $50,000–$100,000 in losses as ordinary income (instead of capital losses) when a qualifying small business fails.

Be sure to log entity types when making investments, so you’re not left scrambling to determine tax treatment years later.

Key Findings in Reg CF data as of March 2025

We analyzed entity structure data from all Regulation Crowdfunding offerings since 2016 to better understand how often startups choose LLCs vs. C-Corporations — and how that choice breaks down across industries.

Here are two major takeaways from that analysis:

  • C-Corporations are the majority of Reg CF offerings, with 56.8% of companies opting for this structure — making them potentially eligible for QSBS and other tax benefits.
  • LLCs are still common, comprising 41.4% of all offerings. However, there are certain industries that are much more likely to have companies formed as LLCs — such as Food, Beverage & Restaurants, with only 32% of all Food & Bev companies being C-Corporations.

Percentage of Corporations by Industry since 2016

Looking at the data by industry reveals stark differences in how often companies choose LLC vs. corporate structures.

Industries like Food & Beverage, Real Estate, Alcohol, and Retail are predominantly formed as LLCs or Limited Partnerships. Conversely, industries more likely to attract traditional VC or private equity — such as Transportation & Aviation, Security & Defense, Industrial Services, Marketing & Advertising, Energy & Natural Resources, Fintech, Fitness, and Software/SaaS — are heavily skewed towards C-Corporations, typically comprising about 70-90% of entities.

LLC vs. C Corp Offerings since 2016

When we aggregate all the industry data since 2016 for Reg CF, we observe that C Corporations (56.8%) are the most common, following by LLC (41.4%) – with all the other types coming in at under 2% total.

Percentage of Reg CF Entity types from SEC Filings

 

Takeaways for the Wise Startup Investor

So, what should the wise startup investor do with this information?

Ultimately, the choice of whether you invest in a certain entity comes down to your personal investment preferences and tolerance for complexity. For instance, even though I understand the tax implications of LLCs, I still hold numerous LLC investments in my own portfolio. That being said, when investing on AngelList, I tend to avoid investing in deals that have complex structures or that invest overseas — as that can bring additional complexities, and is not worth it to me for the investment sizes that I am making.

It’s also crucial to note: investing in LLCs doesn’t preclude massive returns. Many highly successful startups initially formed as LLCs convert to C-Corporations when pursuing venture capital or preparing to go public. Cleveland Whiskey, an investment from my portfolio, did exactly this back in 2019. Here’s another article I wrote in 2020 for investors that details what the LLC to C Corporation conversion can look like in the conversion year.

Initially operating as an LLC gave them flexibility (avoiding corporate-level taxes, or “double taxation”), while converting later allowed them to pursue greater growth opportunities. However, delaying conversion too long can create significant headaches for both companies and investors.

The key takeaway? Always be mindful of a startup’s entity structure and potential tax implications — especially K-1 forms — before investing. A little awareness now can prevent unpleasant surprises at tax time.

That said, it’s important not to let the “tax tail wag the investing dog.” While tax advantages like QSBS are valuable, they shouldn’t be the only factor in your investment decision-making. Missing out on even one wildly successful LLC—just because it didn’t offer QSBS benefits—could mean missing a life-changing return. Ultimately, it’s about balance: weighing potential tax benefits against the overall upside, mission, and fundamentals of the company.