Can I Raise Money Before Forming the Company? And Should It Be an LLC or a Corporation?

You can talk to people before the company exists, but you should not take money until it does, because an investor needs an entity to own a piece of and governing documents that define what they own. Form first, then raise. For a founder-led service business raising from private individuals, an LLC with a well-drafted operating agreement is usually the right vehicle: it allows preferred units with a defined return, passes profits through to investors, and is cheaper to run. A Delaware C corporation is the right choice if you expect venture funding, stock options for many employees or a public listing. An S corporation is rarely right for a raise because of its ownership limits. Formation and the raise should be designed together, since the operating agreement is also an offering document.

By Joel Arberman, founder of Prepared to Raise · 17 companies taken public, 30+ private placements prepared · Published November 9, 2026

Why "raise first, form later" fails

Money accepted before the entity exists is a loan to you personally, a gift, or an undocumented promise, and none of those is what the investor thinks they bought. When the company is formed later, you have to reconstruct what each person was promised, issue units or shares for money that went into your personal account, and explain the gap to the next investor and their lawyer. It is also a securities sale without an exemption, documents or filings. Fixing an undocumented investment is possible but costs more than forming properly would have.

What you can do before forming: have exploratory conversations with your network about the idea and your plans, without describing specific terms or asking for commitments. Once the entity exists and the terms are set, those conversations become the raise.

Which entity, for which kind of raise

LLC (taxed as a partnership)

The default for a service business raising from individuals. Advantages: you can create classes of units with different rights (preferred units with a preferred return, a buyback, limited voting), profits and losses pass through to investors, distributions are flexible, and the governance can be tailored in the operating agreement. Disadvantages: investors receive a K-1 each year, which some dislike; equity compensation for employees is more complicated; and venture funds and some institutional investors will not invest in an LLC.

C corporation (usually Delaware)

The default for venture-style companies. Advantages: familiar to every investor, clean stock option plans, preferred stock with standard terms, no K-1s, and the structure required for a venture round or an eventual public listing. Disadvantages: profits are taxed at the company before any dividend is taxed again at the shareholder, which is painful for a profitable service business that wants to distribute cash to investors; and the formalities cost more to maintain.

S corporation

Pass-through taxation like an LLC, but limited to 100 shareholders who must be US individuals (no entities, no foreign investors), and only one class of stock, so no preferred units. Those limits make it a poor vehicle for a raise. Many owner-operated businesses are S corporations today; converting or restructuring before the raise is common and should be planned with your CPA.

The decision in one question

Will investors be paid from the profits of this business, or from a future sale or venture round? If profits, an LLC. If a sale or venture round, a C corporation. For a healthcare practice, an agency, a mortgage company, a staffing firm or a profitable software business raising from individuals, that points to an LLC. For a software company that genuinely intends to raise venture capital within two years, a Delaware C corporation from the start saves a painful conversion later. If you are unsure, an LLC can convert to a corporation when a venture round requires it; the reverse is much harder.

What the formation documents must do for the raise

A $200 online formation produces an entity with no governing document worth the name. For a raise, the operating agreement or the bylaws and shareholder agreement must:

Create the class of units or shares investors will buy and define its rights: economics, voting, information, transfer restrictions.
Define the preferred return, distribution waterfall and any buyback or redemption mechanics, if used.
Set out management: who decides what, which decisions need investor consent, how the manager or board is appointed and removed.
Handle the founder's departure, death or disability, including what happens to investors' interests.
Fix the cap table at formation: the founder's units, any co-founder, any early contributor, and the pool for investors.

Investors and their advisors read this document. It is, in practice, part of the offering package, and it should be drafted by the same securities lawyer who prepares the subscription agreement. What a private placement attorney does.

Formation and raise as one project: the Founder Launch model

Experienced operators starting a new company often do formation, documents, raise preparation and launch as one sequence over six to twelve weeks: form the entity with raise-ready documents in weeks 1 to 3, build the plan, numbers and materials in weeks 2 to 8, prepare the offering documents in weeks 6 to 10, and open the raise to the founder's network after that. Doing it as one project avoids the common failure where the entity is formed one way, the raise is designed another, and the lawyer has to redo the operating agreement at the worst possible time. Prepared to Raise runs this as Founder Launch, for operators forming a new company and raising up to $10 million; we form the company and prepare the raise, and the founder runs it. We never find, solicit or introduce investors.

Common formation mistakes that surface during the raise

A single-member LLC with no operating agreement, so the first investor's lawyer has to draft one from scratch.
Verbal equity promises to an early helper that were never papered. Investors will ask.
Forming in a state for no reason. Form where you operate unless you have a specific reason (venture funding) for Delaware.
An S election that blocks preferred units or a non-US investor.
Mixing personal and business money in the first months, which makes the first financial statements unreliable.

Where to start

If the company is not formed yet, read Founder Launch to see how formation and the raise fit together. If it is, SAFE, note, loan or LLC units covers what to offer, and the 90-day plan covers the rest.

This article is general information for founders, not legal, tax or investment advice. Securities rules depend on your facts; confirm your plan with a securities lawyer before you accept money.

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