We've reached a point where we need either hard capital or strategic hire capital and as an LLC it seems like it is much harder to grant capital (either immediately or in a vesting process).
Also, the pass through tax situation (we filed a 2553 for the LLC) really hurts us because we tend to drain the bank account at the end of the year so that we're not hit with huge personal tax on money we don't receive. Then the business suffers cash flow issues in January.
It seems that a c-corp -- with it's double taxation issue -- might have been a better choice for us.
So, the options as I see it are to convert the entity to a c-corp (how?) -- or start a new c-corp that becomes a holding company for the llc. Due to the pain in setting up vendor agreements with the majority of our clients, I lean toward the latter plan. It also allows us to "buy" the assets of our individual companies (we all had individual companies before we started this business) in order to use them as tools for exploiting different markets.
Any thoughts or experiences to share?
A third option, which would solve your pass-through tax issue, and would be much easier than the other two options you describe, is to simply change the tax structure of your LLC. You can convert your LLC from a pass-through entity to a corporate entity by filing a form with the IRS. This allows you to keep your company as an LLC, so you don't have to deal with the complexities of owning a C-Corp, while letting you take advantage of corporate taxation. This option won't solve your capital concerns, but it's worth considering.
Are you doing your LLC taxes correctly?
The LLC pass through actually makes it easy to NOT drain the bank account at the end of the year. A C-corp with its double taxation makes this a problem.
For example, if you have a C-corp, you need to pay out all of the profits of the corporation at the end of the year or else you will have to pay corporate taxes on that profit. And then if later you pay that money to yourself, you will pay income tax on it (double tax). Because of depreciation and other ways that you spend money that are not full expensable, you can end up having to pay out more money than you have in your bank account.
An LLC fixes this because the profit the LLC made is "assigned" to the partners in a specific way on their personal returns via a K-1. Then the individuals only need to pay the taxes on this money and they can take a fully expensable distribution from the company to pay this. There is no difference between the money in the company's bank account and your bank account. That money can be distributed both ways without and tax implications.
I'm not an accountant, so there may be some complications I'm glossing over but I've been handling our corporate taxes for the last ten years and for one of our related companies which was an LLC and converted to a c-corp in order to take investments. But @Dana's original answer is correct in that you will need to be a C-corp to take an investment. 99% of venture capital will require that you convert, and the conversion is relatively painless.
If you will be seeking investment from sophisticated investors, your company will need to be a corporation rather than an LLC, and the corporation will need to own all of the relevant assets (customer contracts, intellectual property, etc.).
You did not disclose the state in which your LLC was formed but, as a general proposition, conversion from LLC to corporation is a straightforward legal process. The major potential gotcha is a tax hit - your accountant can advise whether this would be a problem in your situation.
Disclaimer: This answer does not establish an attorney-client relationship.