My first mistake: I filed as an LLC instead of a C Corp

In early 2024, Sabeen Khan filed what she thought was all the right paperwork to start Khoobi, her dream beauty and wellness app.

She originally chose to file her business as a limited liability company, or LLC, “because it came as a package deal with a website and I was like, ‘This is what official businesses do,’” she explained. “When you look up or Google ‘How to start a business,’ it’s always like ‘Start an LLC.’”

The former Wall Street analyst had already quit her job and moved in with her parents to focus on building Khoobi, which she described as a “prediction intelligence platform for beauty brands.” She hired a founder coach and set up the first call a few weeks after officially filing.

During that first meeting, the coach told Khan that some of her choices could prevent her from successfully raising venture capital funding. Specifically, one of the mistakes, the coach said, was that Khan registered her company as an LLC and not a corporation, or a C Corp.

After the call, Khan closed her laptop and cried on the phone to her friend.

“I think I needed the tough love,” Khan told Founder Brew.

The difference between an LLC and a C Corp

Filing as an LLC protects founders from being personally sued for their company’s debts. Profits from the business can also be taxed at the personal income level, not corporate.

A C Corp, on the other hand, takes a little more work. Business owners must form a board of directors, create shareholder agreements, and file articles of incorporation, among other requirements. Critically, earnings are also taxed at the corporate level and shareholders are personally taxed on dividends received.

However, filing as a C Corp is a very important consideration for founders that want to seek venture capital funding.

A 2021 study published in Review of Accounting Studies studied the IPO filings of over 1,100 VC-backed public firms between 1997 and 2014. In total, 98% were organized as a C Corp.

Carolynn Levy, partner and chief legal officer at Y Combinator, also once called registering as an LLC “usually a mistake” for startups.

“If you plan to fundraise from people other than a small group of your friends and family, your startup needs to be a corporation,” she said on a panel in 2018.

The US Small Business Administration also recommends C Corps as a “good choice” for businesses that plan to raise money, go public, or eventually be sold.

The LLC fees could’ve gone towards my C Corp bill

Khan advised founders to choose the C Corp from the beginning. “If you are incorporating your business, incorporate it as a C Corp, don’t do it as an LLC. You’re spending that money. You might as well just start,” she said.

But, as Khan discovered, filing for an LLC does not automatically prohibit you from changing your mind and refiling as a C Corp.

“Changing your LLC to a C Corp is expensive, and it was really hard for me to try to find someone that would do it,” Khan told Founder Brew. “So much so that I just ended up finding a lawyer to help me just do the C Corp in and of itself, and then I kept the LLC. I still have it to this day.”