Is an LLC Actually a Good Idea?

In legal terms, Limited Liability Companies are very much the new kids on the block, having only be made in American law in the 70’s, whereas the corporation has been around since the 1600s.

For many starting out, an LLC makes a lot of sense. It has:

• Flow-thru taxation (not always a good thing),

• It’s easier to form and understand (at least initially), and

• Much cheaper in legal and maintenance costs.

However, that ease, flexibility, and recentness create another sort of problem—the LLC is too flexible.

Because the LLC is almost entirely governed by its main governing document (the operating agreement) and the operating agreement can just be whatever the owners want it to be:

• It’s harder for investors to know what they are truly getting, and

• Every decision needs to be carefully thought through to ensure it doesn’t have unanticipated consequences.

As such, many investors may insist that before they invest, the company switch from an LLC to a Corporation.

Founders should strongly consider these issues when deciding between an LLC and a corporation. If you are looking to bootstrap for a while with the same close group of people, the LLC typically makes more sense in the short to mid-term. But, if you are looking for investors, or thinking of using a lot of incentive equity, while using an LLC isn’t an absolute bar to those things, it will make them more difficult.