As a lawyer for technology startups I have formed hundreds of entities, and in nearly all cases would recommend a California or Delaware corporation, and strongly discourage anyone from using an LLC. I would question the wisdom and experience of anyone who says otherwise. Avoiding double taxation, for example, is the last thing most startups have to worry about.
There are many reasons to favor a corpaoration but the main ones include:
(1) Having a well-known, easy to understand corporate structure so that investors know what they are buying (most funds refuse to invest in an LLC).
(2) Company and investors spend far less in legal and accounting fees.
(3) Reducing risks inherent in LLC operating agreements and in LLC governance.
(4) Ability to create stock option plans.
(5) Creating tiered classes of preferred stock for future investment rounds is more straightforward in a corporation than an LLC.
(6) Complexity and sometimes dire tax consequences involved in converting the LLC to a corporation down the road (which is almost inevitable), or being acquired by a corporation.
(7) Following established business norms for the industry rather than going against the trend is a sign of willingness to play by the rules, and also knowing what you`re doing. Same reason you wear dress shoes rather than sneakers when meeting an investor for the first time.
Every situation is unique and there are sometimes situations where an LLC works. For holding companies, partnership-like enterprises, family businesses that are not expected to grow, financial instruments, etc., LLCs are often preferred. However, as a startup company you want to iron out the unique details and be as generic as you can in your corporate setup so that you are attractive to investors and prepared for rapid, trouble-free growth rather than increasing structural complexity.
For similar reasons you don`t want to put nonstandard terms (like a right of redemption or a right of first refusal in favor of the company) into your investment contract. There is a long list of stock terms that are common to startup investments, but a $1M investment does not necessarily buy the investor a right to preferred stock or all these terms, particularly if you are expecting larger rounds later. That is on the low side.
All of this assumes you are following a standard start-up model, i.e. an angel round followed by larger preferred VC or institutional investment rounds, taking on a growing number of principals and workers who will receive equity compensation, company geared to retaining earnings and reaching a liquidity event as opposed to long term cash dividends.
Hope this helps.
CEO and GC
Alpine Shelter Corporation