With an LLC profits don't get taxed twice like in a regular corporation. So it makes sense to be an LLC if you expect to have substantial profits, but don't expect to grant options, sell shares, or get bought. Consulting firms and law partnerships are often LLCs. YC is an LLC.
But although many of our businesses want venture capital, most are unlikely to get it. In fact, I'd hazard a guess that more tech startups will have income than will have external corporate funders. (This usually happens when the founders need some money, so they put their original idea on hold and do some consulting for a while. Eventually they're doing exclusively consulting, because it pays well, or at least it pays off quickly.) By that point, you're probably unlikely to remember the tax consequences and switch to an S corp.
Why not start out as an S corp, and switch to a C corp iff you acquire VC or sell preferred stock?
If I remember correctly from my corporate tax class, both LLCs and S-corporations are generally treated as "pass through entities" (if the appropriate elections are made). Therefore S-Corporations are not subject to double taxation.
Edit - here's more info: http://www.nolo.com/article.cfm/objectID/A30CE890-BBAA-4B8A-AD66A33FA038988B/111/182/241/ART/
Just to be safe, if you're forming an LLC, you want to file form 8832 and elect to be classified as a partnership (if there's more than one partner), or "disregarded as a separate entity" (if you're all alone). DO NOT elect to be treated as a corporation - unless you want to be taxed as such.
Check-the-box regulations:
- http://www.llcweb.com/struc.htm
- http://www.irs.gov/irm/part4/ch47s05.html#d0e501936
- Form 8832: http://www.irs.gov/pub/irs-pdf/f8832.pdf
This is impolitic, but if you were starting a new venture and Arc were ready to be used in production, would you want to put it into the new company and, if not, how would you handle investors? This is a little more than hypothetical since you are using Arc in Ycombinator business, but it seems like a different situation than when forming a company with investors you barely know.