Ever since I started playing it, I've been wondering this. Why Level 5 instead of 1, 10, 36, or any others?
Though LC was more popularized and supported by Smogon for far longer than the official Pokémon games, Little Cup was originally one of four Stadium Cups introduced in Pokémon Stadium 2. This gamemode was intended for use with newly hatched baby Pokémon as a means of testing the player's ability to breed Pokémon. It's worth noting that prior to Generation IV, newly hatched Pokémon were Lv. 5, as opposed to 1.
Source
