Raising Money? 3 Reasons Why an LLC Won’t Work for Your Startup

An LLC Can Present Roadblocks in Raising Money

There are many quick and “easy” online and do-it-yourself resources to set up a Limited Liability Company on your own. However, an LLC may not be the right way to structure your business if you intend to raise money from investors. Don’t invest valuable time and money forming the wrong structure for your startup. Here are three important reasons why starting with an LLC may not be best for your startup if you plan to raise money in the future:

1. LLCs quickly get complicated and costly

• Although LLCs are easy to start, they quickly become complicated when you try to raise money from investors.
• LLCs have many tax-related provisions that you and your investors will need to understand and navigate.
• Hiring an experienced tax professional will raise the costs of the financing.

2. Financing deal structures & documents are not as common

• Funding structures and documents for LLCs are not as well known or developed, which may slow down your ability to raise money and eat up valuable time and money.
• Corporations are commonly known and provide a quicker path to raising money.
• Raising money is hard enough – don’t complicate the process.

3. Venture Capitalists typically do not invest in LLCs

• Investors in venture capital funds face adverse tax consequences if they invest in LLCs.
• Your company may not be ready now for VC funding, but it could attract it later.
• Don’t limit your pool of potential investors.

When you start your new company, you will have an extensive list of things to do. Don’t rush to check things off your list, because mistakes such as incorrectly setting up an LLC will create extra delays and costs. Take the time to evaluate which legal structure is best for your business, especially if you plan to raise money from investors.

If you already have formed an LLC and need to switch to a corporation, let us know and we can tell you how.

Your turn:

Struggling to determine which legal entity is best for your business? Ask us by leaving us by commenting below. We look forward to hearing from you!