Why VC's Invest In C-Corps

When VCs invest in a startup they require the company to be legally formed as c-corps for a variety of reasons.  While I am not a lawyer and this is not an exhaustive list, I have attempted to articulate the key reasons for this requirement.

Liability:  C-corps appear to provide the strongest corporate veilminimizing the extent to which investors in the corporation are exposed to the company's liabilities.

Pass Through:  Most of the other legal structures do not provide complete separation between the company and its shareholders.  Complete separation between the company and shareholders not only provides VCs with greater protection from legal liabilities incurred by the portfolio company, it also simplifies the accounting.  Since VC firms are structured as limited partnerships, gains and losses realized by a portfolio company that was not a c-corp (and did not have separatation between the company and its shareholders) would be passed through to the limited partners of the VC fund.  This additional accounting would create significant work and administrative costs for these limited partners and lead to substantial fluctuations in accounting valuations of the VC portfolio.

Stock Options:  C-corps can have stock options plans, which are often valuable tools for recruiting and maintaining talent in a corporation.

Familiarity:  C-corps are well-known structures with lots case law surrounding them making navigating the legal jungle easier.

Source: http://mpd.me/how-to-form-your-company/