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Why Does Y Combinator Recommend Against Forming an LLC?

VC’s and angel investors don’t like LLC’s because of familiarity/experience working with Delaware C-Corps, tax reasons, and stock structure/financing flexibility.

My recommendation is to go the Delaware C-Corp route, 9/10 times, especially if you’re a high-growth tech startup. LLCs have only been around for a lot less time than C-Corporations, so angels and VC’s just deal with them less on a day-to-day basis. Furthermore, Delaware’s corporate law has been developing for a very long time, with a lot of case law and really business-oriented judges.

Also, LLCs are a contract-based creation, so it’s tough for investors to value a company based on membership percentages (compared to stock in a corporation), which is easier to put a value on. LLCs are taxed like partnerships, which are very complicated, and tough to convert to C-Corps. LLCs often have to pay self-employment taxes, which are often limited when a company is set up as a C-Corp. VC’s like to limit their tax liability, so they avoid “pass-through entities” such as LLCs.

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