- Get help from legal professionals in your field.
- Determine your level of liability.
- Decide how much control you want.
Deciding to become an entrepreneur is a major decision. The fundamental decisions you make as you start your business will have a dramatic long-term effect on your success. Here are five things to consider when structuring a startup.
Find Legal Counsel
You may be brilliant in your field. But it is unlikely that you know all the legal ins and outs of running a startup.
As you start your new business, you will want to consult with a business lawyer or another expert in the field. They can provide valuable advice on what is best for you as you start your company.
You do not need to do everything they tell you to. But it is good to listen to their reasoning. They have an outside view of your business. This allows them to readily identify advantages and disadvantages that can help you make better structuring decisions.
Decide Your Level of Control
Do you want full ownership and control over your startup? If so, forming a sole proprietorship may be a good option. C corporations, partnerships, and other business structures give at least some power to others.
If you are willing to share some decision-making with outside sources, including investors, a C corporation may be the right option for you.
Determine Your Tolerance for Liability
The legal structure of your startup will impact your liability. A sole proprietor is potentially 100 percent liable for everything that happens with a business.
However, with an LLC or C corporation, liability is reduced. It is usually the business that is reliable for damages as opposed to the individual who operates the business.
The Amount of Time to Dedicate to Your Business Structure
It takes time to set up the structure of an organization. It is easier to set up a sole proprietorship. It requires less time, less initial investment, and less involvement from legal professionals.
If your goal is to get your business going quickly and you are not worried about taking on liability, a sole proprietorship may be the right option for you. However, the desire to get things started quickly should not be the sole factor when deciding how your organization will be structured.
It is good for you to take time to reflect, question, and show curiosity before making the final decision. Look at other companies that work in the same field as you are going into. What type of business structure do they have? Why have they succeeded, or why have they failed?
Seeing the big picture can help you understand if it is better to get multiple people involved or if it is better for you to run things on your own.
Think about Tax Liability
Each business structure has different tax liabilities. For example, depending on your income level, a C corporation may let you have your income tax at a lower rate as opposed to an LLC or partnership. Still, there are several variables that need to be considered as there are different forms, rules, and exceptions that apply to the different business structure types.
The decisions that you make about your organization structure at the beginning can have reverberating tax implications in the future. It is expensive to reverse course and make adjustments to your structure once things are moving full speed ahead.
It is worth it to clearly understand the tax implications and benefits of each organizational structure possible for your startup. The more you have aligned at the beginning, the easier it is going to be down the road.
Change Is Possible
Keep in mind that depending on the structure you choose at the beginning and the structure you want in the future, it may be possible to convert your business to another type. Don’t see this as a safety net. See it as a feasible option that can be pursued on an as-needed basis.
You want your business structure to allow you and your employees that thrive in all situations. You want your organization to reach goals, provide a valuable service to customers, and create an encouraging environment for all involved. These goals can be achieved if you take the time to make wise decisions about the business structure from the beginning.