I know that many businesses are structured as Limited Liability Companies (“LLCs”). Is an LLC an appropriate structure for my Company?

TLDR: If you expect to raise money from outside investors, particularly venture capital, an LLC is probably not the right type of entity for your startup.

Limited liability companies ("LLCs") are a common legal entity, though they are rarely used by companies that are seeking venture capital or other forms of outside investment.

Key Attributes of LLCs:

• Governing documents: LLCs are governed by a Certificate of Formation (in some states referred to as a Certificate or Articles of Organization) which is filed with the state, and an Operating Agreement that allows broad flexibility for governance. Operating Agreements can be as simple or as complex as the founders/investors desire, but the bespoke nature of LLCs means that it is often more expensive and time consuming to form an LLC than a C-Corp.
• Management: An LLC can be member-managed or manager-managed. In a member-managed LLC, all the members (i.e., equity owners) participate in making company-level management decisions. In a manager-managed LLC, certain members or nonmembers/outsiders are designated as managers and are given the responsibility to manage the operations of the company. The other members in a manager-managed LLC are owners who are not involved in most operational decisions but may still need to consent to significant decisions such as selling the company or amending the operating agreement.
• Employee Equity Incentives: As an incentive to employees or contractors, an LLC may issue profits interests, which are somewhat similar to corporate stock options, but come with additional layers of complexity and are generally not as well understood by founders and employees.
• Taxation: LLCs are typically a pass-through entity for tax purposes, meaning that profits and losses are allocated to the LLC members and are required to be paid by the LLC members, instead of by the LLC itself.

Many venture capital firms are prohibited from investing in entities with pass-through taxation because these VCs have tax-exempt limited partners that cannot receive active business income without jeopardizing their tax-exempt status. Even without tax-exempt LPs, most investors are not willing to complicate their tax structure by investing in pass-through entities.

However, LLCs may be suitable for (1) companies that are profitable or that have a small number of owners and are not seeking outside investment, (2) private equity-backed parent companies, and (3) life science “holding” companies for platform technology.

See FAQ "Why should I incorporate as a Delaware Corporation?" for more information.

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