I often hear people (including Brad Feld in the relevant article on the front page of HN right now) saying that a corporation is the right choice if you plan on seeking funding, because venture investors don't want the pass through income that an LLC can create. VC's generally don't want to create Unrelated Business Taxable Income for their investors.

I don't understand why these VC's don't just create a corporation to buy stock in a LLC's. I know for a fact that at least some venture firms do this (I worked at one that did). A corporation can own stock in an LLC, and corporations (when the elect to be a C-corp, which I assume the VC would do) don't generate pass through income.

The only explanation I can think of is perhaps if someone is making small, angel or YC style investments. Then, the administrative cost of setting up and maintaining an additional "blocker" corporation for each investment would be significant in comparison to the total dollars invested.

I am very curious to know what the reason that firms that are investing hundreds of thousands if not millions of dollars don't do this.