Selecting the Best Business Structure for Your Start-Up
January 3rd, 2023
The business structure you select for your start-up can make all the difference when it comes to its success and longevity. Having a defined structure makes a company more appealing to potential investors. The type of entity you choose also determines your tax rates and dictates your day-to-day operations. In addition, the legal structure of your company can be crucial in limiting your liability in the event of litigation.
It’s important to choose carefully when it comes to a business formation for your startup. While it may be possible to convert to a different structure in the future, this can sometimes result in unintended consequences for you and your company.
What is a Business Structure?
A business structure, also referred to as a business entity, is a legal classification that determines how a company is operated and regulated. Choosing the right formation from the outset of your business venture is critical as it can affect many of the decisions you will need to make. Because each type of entity involves different tax ramifications and various levels of liability protection, you should choose the structure that meets your company’s needs.
How to Choose the Best Legal Structure for Your New Business
The first thing you should do when it comes to selecting a structure for your start-up is review your business objectives. There are several different business formations from which you may choose, depending upon your professional and financial goals. Significantly, you should consider the following issues before selecting a start-up business structure:
Tax implications — Depending upon the entity you select, it may be possible to minimize your tax consequences. It’s important to understand that there are many more options for tax-planning when a company incorporates, rather than with a sole proprietorship or partnership.
Limiting your exposure to liability — You should consider the extent to which you will need to be protected from personal liability for any losses associated with the business, as well as potential lawsuits.
Whether you have a business partner — If you are going to have a partner or investor involved in your venture, you should select a business structure accordingly.
Costs of ongoing business operations — The type of structure you choose can impact the ongoing costs of maintaining the business.
Your long-term business objectives — Business owners may sometimes only think about getting their companies up and running. However, it’s essential to think about what you want your business to look like years down the road.
No two start-ups are identical. Every owner has their own organizational, economic, and personal goals for their company. The right structure for your start-up should offer adequate protection from any liability to which you might be exposed — and provide for the stability of the business.
Common Types of Start-Up Business Structures
There is no right or wrong when it comes to selecting a legal entity for a start-up. Each business structure comes with various pros and cons. But no matter the size of your company, it’s vital to make sure you choose a structure that is beneficial for the needs of your growing business.
The most common business entities for start-ups include the following:
Sole proprietorship — A sole proprietorship is the easiest type of business entity to form. With this formation, one individual owns and operates the company. With this structure, there is no separation between the entrepreneur and the company, resulting in lack of liability protection.
General partnership — A general partnership is a legal arrangement where business partners share ownership of the company and responsibility for running it. Similar to a sole proprietorship, there is no legal separation between the business and its owners.
Limited partnership — Another type of partnership in California is a limited partnership structure which offers increased flexibility and protection from liability. This structure consists of at least one general partner and one limited partner. The general partner usually runs the company, while the limited partner invests money in exchange for shares.
Corporation — A corporation is a business structure that is a separate entity from those who founded it. Although this type of business structure is more costly and requires extensive record keeping, one of the benefits of forming a corporation is the avoidance of personal liability.
Limited liability company (LLC) — An LLC can be owned by one member or multiple members. Like a corporation, it limits owner liability. However, it is more flexible, less formal, and does not require as much paperwork as a corporation.
The decisions you make early on for your start-up can have an impact on its success in the years to come. Not only should you choose a structure that safeguards your personal assets, but one that also allows your company to grow and expand.
Contact an Experienced California Business Attorney
Forming a start-up can be exciting — but it might also feel overwhelming. An experienced business attorney can discuss the strengths and weaknesses of the various entity types with you to determine the most advantageous start-up business structure for your company. At White and Bright, LLP, we work with business owners, start-ups, and entrepreneurs in California for a wide variety of business formation and litigation matters. We welcome you to contact or call us at (760) 747-3200 to learn more about our legal services.
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