How to fund your LLC

Every startup has to spend money, whether it’s on product development, payroll, marketing, rent, or the many other costs associated with building a business from the ground up. If your company isn’t yet profitable—or in many cases, even if it is—you will likely need to raise capital to help fund the business. 

One variable that can impact a startup’s fundraising process is how the company is structured: There can be some key differences between raising capital as a limited liability company (LLC) and raising capital as a corporation. 

LLC funding vs. corporation funding

Both LLCs and corporations can raise capital from a wide range of potential sources. But these sources are not always the same. In general, corporations are more likely to raise equity investments from venture capitalists (VCs) and other professional investors, while LLCs are more likely to rely on other types of financing, such as bootstrapping, loans, and grants.

VCs typically prefer to invest in corporations over LLCs because of a few structural advantages:

Tax treatment

An advantage to structuring your business as an LLC is the ability to choose between two types of tax treatments: (1) pass-through taxation as a disregarded entity if a single member LLC or as a partnership if the LLC has more than one member, or (2) taxed as a corporation. There are two relevant types of taxation under the corporation umbrella: C-Corp or S-Corp. Underscoring the flexibility of the LLC, it's possible to have an LLC that is taxed either as a C-Corp or S-Corp if pass-through taxation is not desired.

When an LLC is taxed as a pass-through entity, the LLC members report profits and losses on their individual tax returns. This can be undesirable for VCs and limited partners (LPs) and some LPs may not be able to invest in LLCs. 

QSBS 

Many corporations can offer qualified small business stock (QSBS), on which any capital gains are taxed at a lower rate compared to other types of stock. The QSBS tax exclusion can thus offer significant benefits to investors. LLCs cannot take advantage of QSBS without a complicated conversion to a corporation, which could put the QSBS at risk if not done below the applicable QSBS threshold valuation.

Exit strategy

An LLC cannot conduct an initial public offering (IPO)—typically the most sought-after exit path for VCs—because it does not issue stock. The vast majority of publicly traded companies are corporations. A company structured as a corporation may be more appealing to potential M&A buyers, as well, for many of the same reasons it’s more appealing to VCs. 

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Types of LLC structures

There are a few different varieties of LLC, all of which will likely need to raise capital in some way to fund their operations.

Single-member LLC

A single-member LLC is a type of LLC that’s owned and operated by a single person, known as the member. Because there is only one owner, single-member LLCs are typically small businesses. 

Multiple-member LLC

A multi-member LLC is a type of LLC that’s owned and operated by multiple members.

Series LLC

A series LLC is a type of LLC that functions as a sort of umbrella company for multiple sub-entities, which are known as series. The series LLC structure allows the LLC to keep separate the debts and liabilities of its different series, which can mitigate overall risk. Forming a series LLC can sometimes be easier and less expensive than forming multiple LLCs. 

Types of investors for LLCs & how to get funded

Different LLCs can have very different fundraising needs, and there are many different options and types of investors for raising capital that an LLC’s members can consider. You can consult with a legal or financial advisor for more context on what types of funding might be most appropriate for your LLC. 

Here are some of the most common investment sources that LLCs turn to raise capital to fund the early growth of their business.

Personal assets

LLC members can tap into their own personal assets to fund their company. This can take different forms, such as investing savings, using personal assets as collateral for a loan, or liquidating assets and putting the proceeds into the LLC.

Friends and family

Many entrepreneurs and small business owners try to raise capital from their personal network to help get a new business off the ground. These investments can come in different forms, including an equity investment or a personal loan. Raising capital from friends and family can in some cases be convenient, but it can also be more emotionally fraught than dealing with professional investors or lenders. 

Conventional business loans

One of the most popular funding pathways for an LLC is to raise a business loan from a traditional bank or credit union. Business loans come in many shapes and sizes, with key variables including the loan amount, the length of the loan, and the interest rate. Since LLCs offer limited personal liability protection to their members, personal assets are not at risk in a business loan, unless the borrower chooses to put them up as collateral. 

Small business loans

In the U.S., the Small Business Administration (SBA) offers a range of low-rate business loans to qualifying companies. This type of loan is only available to for-profit companies that meet certain requirements related to size, business type, and creditworthiness. The size of SBA loans can range from a few tens of thousands of dollars to several million dollars.

Credit cards

Credit cards can be a relatively simple source of capital if an LLC is looking for debt financing without having to go through the application process for loans. Some LLCs use a personal line of credit, while others rely on business credit cards. Personal credit cards in particular can have significantly higher interest rates than other types of debt financing. 

Grants

Various government agencies at the federal, state, and local levels offer grant funding to LLCs and other startups. These grants often have strict eligibility requirements related to things like the company’s location, its industry, and its mission. Applying for grants can sometimes be a time-consuming and slow-moving process. 

Crowdfunding

Crowdfunding is the process of raising small amounts of capital from a large number of individual investors. Crowdfunding comes in different forms: In some cases, the investors expect some sort of return on their investment, while in others, crowdfunding essentially serves as a donation. There are several popular platforms for startup crowdfunding, including GoFundMe and Kickstarter. 

→ Learn more about equity crowdfunding and how it works on Carta

Angel investors

In some cases, raising capital from angel investors can be similar to crowdfunding, with many different investors each contributing a small amount to a larger round. In other cases, angel investors write larger checks and act more like traditional venture capitalists. As is the case with most VCs, some angels prefer to invest in corporations rather than LLCs. 

Venture capital

LLCs can also raise traditional venture capital funding. However, as mentioned above, many VCs shy away from investing in LLCs and prefer backing corporations due to an array of structural differences. 

Private equity

Private equity firms are much more likely than VC firms to invest in an LLC. However, most private equity firms focus on investing in mature, profitable companies, rather than startups, which makes PE an unlikely funding source for an LLC in search of early growth capital.