Souring on LLCs

I love LLCs.

LLCs are the lemon drop in the candy store of entity formation choice.

800px-Lemon_Drops

They are hard, they are sour, you have to have patience to enjoy them and you have to suck on them to make them sweet.

A corporation is a Hershey's kiss. Don't bite it, don't roll it around in your mouth, that's fine; it will melt nonetheless, just sitting on your tongue.

The group of entrepreneurs who want to found a company together, want to raise money from investors whom they have yet to identify, want to set up an option plan to incentivize their first key employees - these folks should ordinarily not be forming an LLC. They should form a corporation.

Hershey

Just last month, I had a group of founders tell me they had been advised that they should form an LLC, then go out and seek financing. And they wanted to spend hardly a nickel on company organization and founders docs.

They got bad advice. No question they really needed to form a corporation.

Have a look at Asher Bearman's post from yesterday on The Venture Alley. At first blush, the post appears to be on an obscure legal topic. But the upshot is of practical import to entrepreneurs considering choice of entity, and sobering: not even the Delaware Supreme Court knows whether or not managers of an LLC have standards of fiduciary duty by default.

What it comes down to is this: if you want to form an LLC, you need to be prepared to write your own rules. No two LLCs have ever looked exactly the same. And what you forget to cover? For LLCs, the law may or may not supply defaults, or backstops.

WIth a corporation, you can use the same charter as the last startup that was incorporated, and be fine. If you need to change things later, any lawyer will know how to help you do it, without having to do research or study an LLC's operating agreement. What you don't specify in your corporate organizational docs, the corporate code will fill in for you. And believe me, the Delaware Supreme Court will tell you *precisely* what fiduciary duties you will have as a director, in virtually every corporate situation.

LLCs are good for companies controlled by one person; for deals that are self-funded; for deals that are backed by one or two super sophisticated investors who have their own in-house "family office" or a staff of finance people who relish the opportunity to make a bespoke company; or for brick and mortar businesses that are off the high-growth or venture paths.

Otherwise, pick the corporate chocolate.

Lemon drops from WIkipedia. Hershey's kisses found on the Harrisburg Holiday Inn site. This post is general information and is not legal advice.


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