So, you’ve finally decided to start your business, congratulations! Now comes the not-so-glamorous (but extremely important) question: What business structure should I choose?
Should you feel overwhelmed by this decision you are not the only one. It is at this stage where most founders just find themselves hanging because they do not know whether to set up as LLC, corporation or remain in sole proprietorship. However, the good news is this; once you realize the working aspects of each structure, the correct option tends to be rather evident most of the time.
So, how do we categorize the most frequent business structures, the advantages as well as the disadvantages of the most established types of business structures and how you can make the most correct decision on which one is the best business structure to choose when setting up your startup.
Sole Proprietorship: The Simplest Start
The easiest and cheapest form of business is solo partnership. You don’t even need to file any formation documents, just start operating under your own name or a DBA (“doing business as”).
Pros:
- Minimal paperwork
- Low cost of set up
- Enjoy total freedom of your business
Cons:
- No protection of liability
- More difficult to become capitalized
- You are personally liable to liens and litigations
This system is excellent when a freelancer or other service provider is simply trying his hand. But if you’re planning to grow or take on financial risk, you’ll want more protection.
Limited Liability Company (LLC): Flexibility Meets Protection
One of the most common forms of business startups, and rightly so, is an LLC. It offers personal liability protection, meaning your personal assets (like your house or car) are separate from your business’s liabilities.
Pros:
- Its formation and management is simple
- Flexible tax options (can be taxed as sole prop, partnership, or corporation)
- The protection of own assets
- Less formalities in relation to a corporation
Cons:
- It still needs filing and yearly charges
- Complex to scale on the side of investors
An LLC is probably your best (and most red tape free) option as a solo entrepreneur or a small group of people.
Corporation (C-Corp or S-Corp): Built for Growth
Companies are designed to be large. They are the default choice of startups that intend to raise venture capital or to IPO in future.
Primary types are two:
C-Corp:
General corporation structure. Profits are taxed at both the corporate and individual level (double taxation), but it’s preferred by investors.
S-Corp:
Will not have the disadvantage of double taxation due to taxation to shareholders. Has restrictions on ownership (must be U.S. citizens/residents, limited number of shareholders).
Pros:
- This is perfect in attracting investors
- Well defined ownership pattern
- Scalable
- Holding and well-established structure of law
Cons:
- An increased amount of paperwork and fees
- Strict formalities (board meetings, bylaws, etc.)
- C-Corps Double taxation
Wondering whether to form an LLC or corporation for startup growth? It depends on your funding goals, ownership plans, and how much compliance you’re comfortable managing.
Partnership: For Two Or More Founders
If you’re going into business with someone else, a general partnership or limited partnership could be an option. This is still uncommon among contemporary startups, although it might be applicable in small firms such as consultancy or local services.
Remember only one thing, general partnerships do not provide liability protection and therefore in case one of the partners makes a mistake then both you two can be legally at fault.
When Should You Reevaluate Your Business Structure?
You may change your business needs with time. What benefit you at the start may not fit you in developing. Thinking of expanding, hiring or raising capital? It would be a fine moment to reevaluate your present structure (LLC, corporation or otherwise) to determine that it still fits your objectives, compliance requirements and tax plan.
Ask Yourself These Key Questions
Still stuck on choosing between llc or corporation for startup goals? Ask yourself:
- Will I take external funds?
The VC or angel investors do better with corporations.
- Am I going to require flexibility in taxes imposed on profits?
LLCs present you with additional tax choices.
- Is my business a low-risk business providing service?
All that you may need to remain secure is an LLC.
- Is there something I wish to reinvest into the business by making profits?
A C-Corp model can serve to limit individual sourced taxes on income spent back into an enterprise.
- What is the level of paperwork I will be comfortable in?
The corporations demand more registers and active adherence.
It is usually a trade-off between control, liability protection and difficulty.
Final Thoughts
Selecting an appropriate business entity should not be a pain in the crown. Whether you’re leaning toward a corporation for startup plans or llc, what matters most is aligning your structure with your business goals.
Start simple if you’re unsure, you can always convert your business structure later as you grow. Bear in mind, the most excellent judgment is that both the legal protection and the vision is taken into consideration.
Not giving up and deciding about the right kind of structure? You may want to discuss your personal situation with a business attorney or a business accountant. A little expert advice now can save you a lot of hassle (and money) later.
