One important thing you need to decide when setting up your startup is what type of business structure to choose. There’s no right or wrong answer. The structure you pick will very much be determined by your specific business and your goals.
Get started by looking at the following overviews of the most commonly used business structures. You can then weigh up the pros and cons of each to decide which structure is best for your startup.
If you want to keep things simple, use a sole proprietorship structure. That simply means you are your business. The company starts in your name and all payables come from your own expenses.
Mixing your personal and business expenses can become problematic, and you’ll be entirely responsible for all of the financial issues related to your business.
But if you want to have no one to answer to and you want to keep things simple, a sole proprietorship could be your best option.
If you’re setting up your startup with one or more partners, you’ll need to use the partnership business structure. Like a sole proprietorship, this type of structure is also simple to operate. But you will need a formal partnership agreement that’s signed by all partners.
This option is a sort of partnership upgrade. It’s the same as a partnership, in that the general partners are responsible for the business, but investors can purchase a limited partnership interest.
Though, limited partners aren’t embedded in a business in the same way as general partners are.
Limited Liability Company
Things get a little more complex with an LLC, but this option does provide your company with a more formal legal structure and you gain protection from liability.
With an LLC, your business assets and debts and personal assets and debts are kept separate. And with this business structure, there’s no limit regarding the number of members who can act as “partners”, and ownership is able to be broken down into various classes.
That means you can gain greater flexibility concerning raising equity financing. Setting up an LLC especially makes sense if you’re at the stage where you want to attract angel investors. You can find many LLC formation services online.
LLC norms vary state by state and the registered agent can guide you through the norms of that particular state. If we consider LLC in California, the legislature has waived formation fees for domestic and foreign LLCs, corporations, and limited partnerships. Only a registered agent can inform you of such updates in the guidelines.
Startups often choose to structure their businesses as C Corporations. If you’re pre-revenue or in the early stages of your business, and you have your eyes on venture capital, setting up a C Corporation can make a lot of sense.
Venture capitalists are more comfortable investing in C Corporations. Plus, by going with this structure, you gain separation between your business taxes and debts and your personal assets.
By going through this new business checklist, you can better decide if a C Corporation structure is right for your startup.
Lastly, you could use an S Corporation business structure. The great thing about S Corporations is they can avoid taxation on their corporate income at the federal and state levels.
Though, overseas taxes are another matter. So, you should check out these tips for overseas small business taxes. In addition to having shareholders, with an S Corporation, you get to separate your personal assets from your company’s debts.
However, one drawback of an S Corp is that, if you’re looking for venture capital, you’re limited to just one class of stock, so you can’t engage with multiple financings.
Having said that, when you set up your business as an S Corporation, you still have the option of converting your business into another type of entity later down the line.