How Should You Structure Your Company?
When you’re thinking about what type of business to start, there are many options. It’s all about making the best choice for your company based on your goals. There isn’t one definitive option for you, but here are things to consider:
1. Do you like the idea of making all the decisions yourself? If the answer is yes, you may want to start a sole proprietorship, which means you are your own business. In this type of business, you are responsible for all the financial issues. This could be ugly when it’s tax season or if there’s a lawsuit against your business.
2. Do you want to have partners but still be independent? If your answer is yes, you may decide to form a partnership. This requires some sort of formal partnership agreement signed by everyone. It’s a simple business structure that’s easy to operate, and it allows you to raise money by selling partnership interests. But with general partnerships, there are still some measures to take to ensure the line between personal and business finances aren’t blurred. The last thing you want is for your personal finances to be jeopardized because of business issues. This could lead to loss of partners and unforeseen liabilities.
3. Do you prefer a partnership but also want the option of looking for investors to purchase limited interests? If your answer is yes, you’re looking at a limited partnership. Unlike full partners, limited partners aren’t embedded within a business. For founders, a limited partnership means the involvement of limited partners is minimal, and you are still entirely in control of your business.
4. Do you want a more formalized legal structure that protects you from liability and a structure that separates your personal assets from you company’s debts? Then your best option is to go with a limited liability company. With an LLC, there’s an agreement that governs operations, so it’s somewhat more rigid than an LP. LLCs don’t have advisory boards or hold annual meetings. There’s no limit to the number of members. Ownership can be split into different classes, which gives founders flexibility when it comes to raising equity financing. LLCs make sense if you’re at the stage where you can attract angel investors who will be motivated by the potential tax losses.
5. Do you have your sights set on venture capital? If your answer is yes, a C corp makes sense for you. Venture capitalists are comfortable investing in this type of company. There are advantages to this entity outside of funding. You have a separation between debts, taxes, and legal structure from your personal assets.
6. Do you want a company that can avoid taxation of corporate income? Then an S corp is for you. This is a good option for you if you are okay with limiting the number of shareholders who need liability protection. An S corp separates personal assets from your company’s debts and offers tax benefits. S corps aren’t so great if you’re seeking venture capital since you’re limited to one class of stock.