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Start-Ups

How to Choose Your Business Structure

By Barbara Beauregard   |    February 11, 2016   |    10:07 AM

What Business Structure is Right For You?

When it’s time to choose a business structure for your startup, things can quickly get confusing. From sole proprietorships to LLCs, it can be very difficult figure out what business structure is right for you. While there are many options, there’s no one best choice for the type of business entity you choose to legally operate under. There may be, however, a best choice for your particular company based on your business or performance goals. Let’s outline the most common types of business structures to help you decide on the best one for your startup now and in the future.

  1. Sole Proprietorship. This one is simple—you are your business. The company is launched in your personal name and you pay for the company’s bills from your personal expenses. This model presents advantages based on its simplicity and the fact that you don’t have to answer to other people or entities in order to make decisions, especially financial ones. The disadvantage here comes from merging your personal expenses with your professional expenses. Taxes and/or lawsuits can complicate these disadvantages quickly. This model is fine for freelancers, such as writers or artists, but if your startup company is complex or involves multiple people, you’ll want to choose another legal model for your enterprise. You may also choose to file a legal designation called a DBA, which stands for “doing business as.” DBAs are usually only used for marketing in order to put a more professional public face on your sole proprietorship.
  2. Partnership. Most startups inevitably bring in partners, so you’ll probably need to set up a general partnership agreement, which formalizes the relationship between partners. Operating your startup as a partnership will enable you to raise money by selling interests. This is more complex than a sole proprietorship but there’s still a need to use caution in order not to blur the line between personal and professional finances in the event of a business challenge. Much like a nonprofit organization, there needs to be clear delineation between roles, responsibilities, and liabilities.
  3. Limited Partnership. These are a variation on general partnerships. You will still have general partners in your startup but investors can purchase an interest via a share in a limited partnership. Limited partners don’t carry the liabilities that general partners do. It’s a bit of a win-win situation. Limited partners are only risking their original investment and their authority over the startup is limited, so you maintain control.
  4. Limited Liability Company (LLC). Here’s where you start to see some protection from liability. Your personal assets are separated from your company’s debts. LLCs don’t have to attract boards of directors, record minutes or do annual meetings. LLCs have members as opposed to partners, so there’s some flexibility for startups in terms of raising financing. These is a good option for startups looking to attract angel investors but are not yet ready to raise venture capital.
  5. C Corporation. This is where startups start looking for venture capital, as VC investors are comfortable investing in this category of company. Again, this entity offers benefits in terms of separating debts, tax and legal issues from your personal assets.
  6. S. Corporation. This category is named after a subchapter of the federal revenue code that allows these startups to avoid taxation of corporate income. They’re limited to one class of stock, so they’re better for early-stage startups and not businesses seeking that mad VC money.

Keep in mind that it’s always possible to convert your company into a different business structure at different phases of its lifecycle. Meet with an attorney or finance professional, express the goals of your startup, and it should be pretty obvious which business structure is going to offer the most benefits for your entrepreneurial startup at the time.