What is a C-Corp & Why Do Investors Prefer Them?

If you’re building a biotech company, you already know that fundraising isn’t optional. The capital it takes to fund R&D, navigate regulatory hurdles, and get a product to market—whether it’s a therapeutic, diagnostic, or medical device—is massive. Bootstrapping can only get you so far.

That’s why most life sciences entrepreneurs eventually look to angel investors or venture capital firms for funding. But when you start having those conversations, you’ll quickly notice a pattern: investors overwhelmingly prefer startups that are incorporated as a C corporation—or C-corp—under Subchapter C of the Internal Revenue Code.

Why? It’s not just tradition. It’s structure.

This article breaks down what a C-corp is, how it compares to other types of business entities like LLCs and S-corps, and why venture capitalists see it as the default for high-growth startups.

Your Business Structure Sets the Stage

Before raising capital, you’ll need to choose a legal entity for your company. It might feel like a formality—just paperwork with the Secretary of State—but this early decision shapes how you raise money, pay taxes, manage ownership, and eventually exit.

Founders often consider forming an LLC (limited liability company) or an S-corp, both of which are pass-through tax entities. That means the company itself doesn’t pay corporate income tax—profits and losses are reported on the personal tax returns of the owners. This setup can offer simplicity and tax benefits, especially early on.

But if your long-term plan includes raising venture capital, issuing stock options, or going public via IPO, many lawyers and investors will point you toward a C corporation instead.

Yes, C-corps come with some downsides—most notably double taxation (the company pays income tax at the corporate level, and shareholders pay again on dividends or distributions). But they offer critical upsides that venture capitalists, angel investors, and their limited partners often require—particularly around ownership structure and how corporation shareholders report income.

Why? Tax-exempt investors like pension funds and endowments—common LPs in venture funds—must avoid unrelated business taxable income (UBTI). Investing in pass-through entities like LLCs or S-corps can trigger UBTI, which makes C-corps the default for clean, scalable deal flow.

In short: if you’re serious about raising equity, your business entity matters. And many VCs simply won’t invest unless you’re a C-corp.

What Makes a C-Corp Different?

A C corporation is a legal entity that’s completely separate from its founders and shareholders. It can enter contracts, sue or be sued, own property, and issue stock—just like a person.

That separation is key. Unlike a sole proprietorship or partnership, where your personal assets are tied to the business, a C-corp offers strong liability protection. It also comes with stricter compliance: articles of incorporation, bylaws, a board of directors, and regular filings with the IRS and your state.

The big tradeoff? Double taxation. C-corps pay corporate income tax on profits at the corporate level, and then shareholders pay personal income tax when those profits are distributed as dividends. Other entities like LLCs and S-corps avoid this by passing profits through to stockholders’ personal tax returns.

So why form one? Because no other type of business offers the same structure for raising capital. Only C-corps can issue both common stock and preferred stock, making them uniquely suited to handle equity investments, stock options, and liquidation preferences—all things venture capitalists care about.

There are other corporation statuses out there—like B-corps, nonprofits, and S-corps—but if you’re aiming for scale and looking to raise money, the C-corp is the most flexible, familiar structure for investors.

Why Investors Prefer C-Corps

When it comes to raising capital, structure matters. Most venture capital firms are structured as limited partnerships that manage capital from tax-exempt entities like pensions, endowments, and foundations. These entities can’t afford to generate unrelated business taxable income (UBTI) or deal with pass-through complications.

That’s why many VCs won’t invest in anything but a C-corp. In fact, some are legally restricted from doing so.

C-corps make it easier to:

• Issue preferred stock with rights like liquidation preferences, anti-dilution protection, and board representation
• Offer stock options to employees without triggering pass-through tax issues
• Manage ownership cleanly, with no restrictions on the number of shareholders or requirement that they be US citizens or natural persons
• Set up a clear corporate structure with bylaws, a board of directors, and articles of incorporation

In contrast, LLCs and S-corps can be limiting. S-corps cap ownership at 100 stockholders and prohibit non-human investors. LLCs require a custom operating agreement and create tax treatment headaches for VCs when it’s time to distribute gains or file tax returns.

If you’re planning to raise money from outside investors, forming a C-corp early can save you from restructuring later—and makes your startup easier to fund from the start.

The Power of Preferred Stock

One reason C-corps are favored by investors? They can issue multiple classes of stock, including preferred stock—a key tool in venture financing.

Unlike common stock, preferred stock gives investors special rights and protections. These may include:

• Liquidation preferences (investors get paid first if the company exits or shuts down)
• Anti-dilution protection (safeguards against future down rounds)
• Conversion rights (option to convert to common shares)
• Dividend rights
• Board seats or voting rights

This class of stock helps investors manage risk while giving you, the founder, access to significant funding. It also aligns with how most venture capitalists model returns and structure deals.

LLCs and S-corps can’t offer these same rights as cleanly—or at all—which is why most law firms, accelerators, and investors will point startups toward a C-corporation structure from the beginning.

More Flexibility, Fewer Headaches

From an investor’s perspective, C-corps offer the cleanest legal framework. There are no hard limits on the number of shareholders, no requirement that owners be natural persons or US citizens, and no pass-through complications tied to personal tax returns.

That’s not the case with LLCs or S-corps.

S-corporations, for example, can’t have more than 100 shareholders, and they can’t accept investment from most venture capital firms, which are structured as limited partnerships. The IRS restricts S-corps to individual shareholders—not entities like VC funds or trusts.

LLCs offer more flexibility than S-corps, but they come with their own set of complications. Venture firms often can’t invest in LLCs without triggering tax issues for their limited partners, and custom operating agreements add unnecessary complexity during deal structuring.

In contrast, a C corporation’s structure is familiar to investors and lawyers. The rules around ownership, stock issuance, governance, and corporate income are predictable—especially for startups incorporated in Delaware, where most venture-backed companies are formed.

Understanding the Tax Tradeoffs

One of the biggest knocks on C-corps is double taxation—and it’s real. First, the corporation pays income tax on its profits. Then, if it distributes those profits to shareholders as dividends, the recipients pay personal income tax again.

That’s why some founders lean toward LLCs or S-corps early on. These pass-through entities avoid double taxation by passing profits (and losses) directly to the owners, who report them on their personal tax returns.

But there’s a flip side: investors don’t want to be on the hook for a company’s tax liabilities—especially if they don’t receive any distributions. That’s one reason venture capital firms generally avoid pass-through entities altogether.

A C-corp’s tax status separates company obligations from shareholder obligations. Investors aren’t liable for a company’s tax bill, and they don’t have to deal with K-1 forms at tax time. It keeps things clean.

And if you’re aiming for a big exit, a C corporation also opens the door to Qualified Small Business Stock (QSBS) treatment under Section 1202 of the Internal Revenue Code—a potential tax benefit that could exempt up to $10M of capital gains from federal taxes, if you meet the criteria.

Forming a C-Corp Early Can Save You Later

If you're planning to raise venture funding, issue stock options, or eventually go public, forming a C-corp now can save you from major headaches down the line.

Plenty of founders start out as an LLC or S-corp—especially when they're bootstrapping or testing an idea. That’s fine in the early days. But most end up converting to a C corporation before serious funding conversations begin.

The reason? Venture capitalists expect a specific corporate structure: a Delaware C-corp with clean articles of incorporation, a defined board of directors, and the ability to issue preferred stock. Anything else slows the process, adds legal costs, and complicates negotiations.

If you're not there yet, you can make the switch. But it takes time, paperwork, and money—especially if you already have revenue, IP, or investors involved. You’ll need a lawyer to help navigate the issuance of new stock, handle corporation shareholders, and possibly update your employer identification number (EIN).

So if you know you’ll want outside investment—or just want the liability protection and tax treatment that scale with your company—incorporating as a C-corp from the start is often the cleaner path.

Final Thoughts: Start With the End in Mind

Choosing a business entity may feel like a technicality—but for entrepreneurs building high-growth startups, it’s a strategic decision.

If your vision includes raising venture capital, offering stock options, or planning for a major liquidity event like an IPO or acquisition, a C-corp gives you the right foundation. Yes, it comes with corporate tax obligations and more structure—but that structure is what makes it easier to scale, fundraise, and eventually exit.

That’s why most venture capital firms, angel investors, and law firms will tell you: start with a Delaware C-corp, and build from there. It’s not just about checking a box. It’s about setting yourself up to grow.

One last note: This article is for informational purposes only and does not constitute legal, tax, or financial advice. Every startup’s situation is unique. Before forming a C-corp, switching from an LLC, or making any decision about your company’s tax status or business structure, consult with a qualified attorney or tax advisor.