You're building something ambitious. You know you'll need outside capital to scale—whether from angel investors, venture capital firms, or other funding sources.
But before you can raise money, you need to answer a fundamental question: What business structure should you have?
Get this wrong, and you might find yourself unable to accept investment, facing expensive entity conversions mid-fundraise, or dealing with a cap table so messy that investors walk away.
Here's what many founders discover:
The business structure that works great for a bootstrapped business can be completely wrong for a company raising outside capital. Investors have strong preferences—and sometimes strict requirements—about entity type.
This article walks through how founders commonly approach business structure decisions when they plan to raise money, what investors typically expect, and the trade-offs involved in different structures.
Why Investors Care About Your Business Structure
Before diving into specific structures, it's important to understand why investors care so much about entity type.
Investors typically consider these factors:
1. Tax Treatment
- How will returns be taxed?
- Do they receive K-1s (partnership tax forms)?
- Will they face UBTI (unrelated business taxable income) issues?
- Can they benefit from qualified small business stock (QSBS) treatment?
2. Ownership Documentation
- How is ownership evidenced (membership units vs. stock certificates)?
- Can ownership be easily transferred?
- Are there standardized documents investors recognize?
- Does the structure support preferred stock with special rights?
3. Governance and Control
- How are voting rights structured?
- Can different classes of ownership have different rights?
- Are there established governance norms?
- Can investors get board representation?
4. Exit Flexibility
- How easy is it to sell the company?
- Can the structure support an IPO if successful?
- Are there transfer restrictions that complicate exits?
- Does the structure allow for acquisitions?
5. Future Fundraising
- Will this structure work for Series A, B, C fundraising?
- Do later-stage investors expect certain structures?
- Can the company easily issue new equity?
- Are there securities law advantages?
The bottom line: Different investor types have different preferences, and some structures simply won't work for certain types of capital.
To understand what comes next after formation, see What Really Happens When You Form Your Business: Beyond the Paperwork, which walks through post-formation compliance and operational steps investors expect to see handled properly.
The Investor Landscape: Who Wants What
Different capital sources have different entity preferences:
Friends and Family
Typical acceptance: Most flexible
- Often comfortable with any structure
- May accept simple LLC membership interests
- Sometimes provide loans rather than equity
- Usually not demanding about governance
Common pattern: Many founders start with whatever structure makes sense, then convert before institutional investment.
Angel Investors
Typical preference: Flexible, but prefer corporations
- Often accept LLC structures in early stages
- Increasingly expect C-Corporations
- Want clear equity documentation
- May require conversion rights before investing
Common pattern: Many angel investors will invest in LLCs but may request conversion to C-Corp before or concurrent with investment.
Venture Capital Firms
Typical requirement: C-Corporation (almost always)
- Strongly prefer Delaware C-Corporations
- Need preferred stock with liquidation preferences
- Require specific governance rights
- Want structure compatible with future VC rounds
Common pattern: VC firms rarely invest in LLCs. If a company is structured as an LLC, conversion to C-Corp is typically required before VC investment.
Institutional Investors / Private Equity
Typical requirement: C-Corporation or specific structures
- Strict requirements on entity type
- Need specific governance mechanisms
- Want predictable tax treatment
- Require structures compatible with their fund rules
Strategic Investors / Corporate Venture
Typical preference: C-Corporation
- Prefer structures they understand
- Want compatibility with their systems
- Need clear governance rights
- Prefer standardized documentation
Key takeaway: As you move up the capital ladder—from friends and family to angels to VCs—investor requirements become more strict, with almost universal preference for C-Corporation structure at institutional levels.
Avoid costly early-stage mistakes by reviewing our guide on 5 Business Structure Mistakes Founders Make (And How to Avoid Them), which explains common formation errors that complicate fundraising later.
Related Resources
Learn more about Business Formation for startups.
Single-Member LLC vs. Multi-Member LLC: What's Right for Your Startup? - Understand ownership, tax, and compliance differences that impact investor readiness
What Really Happens When You Form Your Business: Beyond the Paperwork - Discover post-formation compliance and operational steps investors expect