Limited liability
If the company signs a lease it cannot pay, gets sued by a customer or ends up owing a vendor, the claim is against the company. Stockholders can lose what they put in, but their homes and savings are not exposed to the company's debts. This is limited liability, and it is the oldest reason corporations exist.
It comes with conditions. Courts will ignore the corporation and reach the owners, which is called piercing the corporate veil, when the company was a sham: the owners paid personal bills from its account, it never had enough money to meet its obligations, or nobody treated it as a separate entity. Delaware courts do this rarely and only for something close to fraud. You make it a non-issue by doing a few dull things consistently. Keep a separate bank account and never mix personal and company money. Sign contracts in the company's name, as an officer. Have the board approve what boards approve, and keep the paperwork. Pay the franchise tax and the registered agent every year so the company stays in good standing.
Limited liability never covers what you do yourself. If you mislead a customer, misclassify employees, fail to pay over payroll taxes you withheld or personally guarantee a loan, the corporate form does not protect you.
Clear ownership
A corporation turns "we're building this together" into a number. Each founder owns a stated number of shares out of a stated total, under a written agreement that says what happens if they leave. That clarity matters most at the moments founders least want to talk about it: when a cofounder quits, when an investor's lawyer asks who owns what, and when the company is sold and the proceeds are divided.
Stock also lets ownership change in an orderly way. The company can issue new shares to an investor, set aside a pool for employees, buy back a departing founder's unvested shares and record transfers, all through procedures the law already defines.
Something investors can buy
Venture investors buy equity, and the standard instruments they use, from the first SAFE to a priced round of preferred stock, assume a Delaware C corporation. The standard SAFE forms say so in their opening paragraph. Venture funds also have structural reasons to avoid LLCs, which the LLC chapter explains. A company that wants venture money without being a corporation will have to convert into one first, usually under time pressure.
Equity for the team
Startups pay early employees partly in equity because they cannot match large-company salaries. A corporation can grant stock options under a board-adopted plan, including incentive stock options that are taxed favorably for employees, and it can sell restricted stock to early hires. These tools were built for corporations. An LLC can grant profits interests instead, which work but are less familiar to employees and recruiters, and every holder receives a K-1 tax form each year.
Taxes that reward founders and early employees
A C corporation pays its own income tax, currently a flat 21 percent federal rate, and stockholders pay tax again on any dividends. That double tax sounds worse than it is. Most startups lose money for years, pay no dividends and reinvest everything, and the founders and investors make their money when they sell their stock.
When they do, a C corporation offers something no other entity does: qualified small business stock under Section 1202 of the Internal Revenue Code. If you hold original-issue stock in a qualifying company long enough, much or all of your gain can be excluded from federal income tax, up to the greater of a dollar cap or ten times your basis. For stock issued after July 4, 2025, the exclusion is 50 percent after three years, 75 percent after four and 100 percent after five, with a $15 million cap per company. Stock issued earlier generally needs five years. The company has to meet conditions on its assets and business, so treat this as a reason to be a C corporation from the start rather than as a promise.
The holding periods for this exclusion and for long-term capital gains start when you acquire your stock. Founders who incorporate early and buy their shares at formation start both clocks as early as they can.
What it costs
Incorporating has costs, and some recur every year. There is a state fee to file the certificate, which depends on how many shares you authorize. Delaware requires a registered agent, which charges an annual fee. Every March 1 the company owes Delaware an annual report and franchise tax; for a typical startup with 10,000,000 authorized shares, that is a $400 minimum tax and a $50 filing fee, as long as the tax is calculated the right way, which the franchise tax chapter explains. If you operate outside Delaware, your home state adds its own registration fees and taxes. The company files a federal corporate tax return every year, even with no revenue. And it takes some discipline: board approvals, records and separate finances.
For a company that means to raise money and hire, these costs are small next to what they buy. For a side project with no cofounders, money or employees, they may be premature, which is what the next chapter is about.