Picking the Best Business Structure for Your Startup

Picking the Best Business Structure for Your Startup
Setting Up Startup Business Structure

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Picking the Best Business Structure for Your Startup

One of the most impactful early decisions when launching a startup is choosing your business structure. The legal entity you form your company under determines everything from taxes, liability, fundraising options and more.

With so many options like LLCs, S-Corps, C-Corps and more, how do you determine the right structure for your startup? Weigh these key factors carefully before incorporating to pick the best model to fuel your growth.

Consider Your Fundraising Plans

If you plan to raise outside funding from investors now or in the future, incorporating as a C-Corporation is typically the best move. C-Corps provide the most flexibility for issuing different classes of stock, options and warrants to investors.

LLCs can issue ownership units but don't have shareholder stock. And S-Corps come with restrictive shareholder number and ownership requirements that often don't work for venture-backed startups.

C-Corps do come with more complex accounting and paperwork requirements. But the fundraising advantages often make this the ideal structure for startups planning to scale.

Evaluate Your Tax Implications

LLCs and S-Corps provide the benefit of "pass-through taxation" - business income/losses pass through to the owners' personal returns. This avoids "double taxation" of first taxing the corporation and then shareholders upon distribution.

With a C-Corp, the entity is taxed separately from the owners. Profits are taxed first at the corporate level and again as personal income if/when distributed as dividends.

For bootstrapped companies or those planning to reinvest most profits back into growth, pass-through taxation with an LLC or S-Corp may yield better tax treatment. Consult an accountant to model your specific tax situation as there can be a number of other variables that come into play.

Factor in Liability & Asset Protection

LLCs provide solid personal asset protection by separating your personal assets from the company's assets should you ever face lawsuits or bankruptcy. Sole proprietors and partnerships don't have this liability shield.

For businesses with higher litigation risks like healthcare or manufacturing, the liability protection of an LLC or Corporation is likely preferable. Though insurance and asset management strategies can (and probably should) also be used to help mitigate liability.

Understand Ownership Structure Flexibility

LLCs allow for very flexible ownership structures through operating agreements dictating ownership percentages, allocations of profit/loss, voting rights and more. Standard LLCs also have no restrictions on number of owners.

S-Corps are limited to 100 shareholders and only one class of stock. C-Corps allow different share classes but come with more complex equity planning considerations as well as filings & paperwork.

If you want maximum flexibility to divvy up ownership and introduce new members or investors, LLCs provide the most latitude.

Factor in Compliance Requirements

LLCs have the least demanding ongoing compliance requirements, like no board of directors or annual shareholder meetings. C-Corps and S-Corps come with more stringent record-keeping, meeting and governance obligations.

Complex compliance isn’t necessarily bad if it helps instill financial rigor as you scale. But lean startups may benefit from an LLC’s simplicity early on. You can always convert to a Corporation down the road.

Align with Your Business Goals

Ultimately there is no one-size-fits-all "best" entity. Matching business structure to your specific goals and needs is key.

If you plan to bootstrap or pursue debt-financing, an LLC may be simplest. If you expect complex equity investment, C-Corp often works best. Weigh factors like taxes, liability, compliance and flexibility based on your startup’s envisioned path.

Partnering with a lawyer to determine optimal corporate structure at the outset prevents headaches as your company grows. Take the time to make an informed decision when establishing your business entity and revisit as your needs evolve. With the right corporate foundation supporting it, your startup is positioned for success.

Want to read more? Check out: Five Ways to Find an Effective Business Partner