Why a C-Corporation? Why not an LLC?

The venture finance model is built on top of Delaware C-corporations, including all of the agreements, structures, accounting, and tax rules. Over several decades, Venture capitalists and startup lawyers have developed standardized contracts and best practices for C-corporations to handle multiple founders, investors, and employee-shareholders. Due to its time-tested rules, it's also ideal for running your corporation electronically through a platform like Gust Launch.

Limited Liability Companies, known as LLCs, have many appropriate uses. However, it would be difficult and contrary to current market standards to operate a venture-funded startup as an LLC.  For one, the tax rules governing LLCs significantly complicate employee equity incentive plans. Setting up a high-growth startup as an LLC also generally requires expensive custom legal drafting, adding unnecessary friction to your startup's growth. Many venture funds are also limited in their ability to invest in LLCs because of the pass-through tax nature of such entities. The venture community knows this, so just as they choose Delaware as a state, they will also insist on working with C-corporations.

Most companies that initially form as LLCs generally are required to convert to C-corps, at considerable cost and delay, as a condition for obtaining funding from sophisticated angel and venture capital investors. The primary reason for incorporating a startup as an LLC would be for tax benefits in cases where the founder(s) are either investing heavily up-front and expecting to generate sizable losses for years, or expecting to generate large amounts of cash quickly and pay dividends regularly. If either of these scenarios describes your situation, you should consult an attorney and discuss the advantages, disadvantages, and costs of such a decision.