This entity is owned by two or more people. There are two types: a general partnership in which everything is shared equally; and a limited partnership in which only one partner has control of his or her business, while the other person (or persons) contributes to the profits and receives a portion of it. Partnerships have a dual status of sole proprietorship or limited liability company (LLP), depending on the financing and liability structure of the company. When you were a kid, you probably managed to set up a lemonade stand and get straight to the point. As an adult, starting a business isn`t as easy and one of your first decisions will be how to structure your business. While a C company is probably the best choice if you`re starting a high-growth, financially intensive startup, there are seven main business structures that you should generally consider — each with its own pros and cons. Most businesses are founded to generate immediate and predictable revenues. Because there is less need to raise capital through the sale of equity, there are often fewer owners in income corporations who generally prefer to focus on income without the distraction of complex governance. They also want a flexible structure that can be adapted to unique circumstances. Depending on whether liability protection is required or not, a sole proprietorship, partnership or LLC may be a good choice. LLC is the most popular choice. One of the reasons founders find themselves in difficult situations to manage is the lack of clearly defined relationships. The lack of an organizational structure can lead to unwanted ambiguities and unnecessary friction between team members and founders.
Most founders chose flat organizational structures to encourage self-motivation and ownership, but there could be a downside to removing some organizational boundaries in an early startup. Starting with the goal, the choice of structure becomes clearer for the founders. Choose the legal structure that best allows you to achieve your financing goals. Other structuring options available to you include setting up escrow agreements or forming a joint venture. There are a number of different « flavors » of trust and joint venture structures, all of which have different pros and cons. There`s one important reason why almost all venture-backed companies register as a C-Corp: your investors are likely to demand it. Indeed, the « passed-on » tax status of an LLC or S Corp means that investors must pay taxes on their share of your company`s profits. This is an administrative problem that most investors do not want. Choosing the right legal structure for your business starts with analyzing your company`s goals and considering local, state, and federal laws. By defining your goals, you can choose the legal structure that best suits your company`s culture. As your business grows, you can change your legal structure to meet the new needs of your business.
A limited liability company (LLC) is the new business unit that offers great flexibility in terms of taxation and management. The essence of an LLC is that the owners can contractually agree on how the company is managed. Flexibility is good, but the new contractual conditions make the outcome of a possible dispute between owners and managers much less predictable than the stricter requirements of companies. LLC also has a lot of tax flexibility. As a founder, you are faced with a variety of important decisions. One of the first is to decide which legal structure is best for your startup. There are several ways to integrate, each with its pros and cons. Before making a decision, you need to have a basic understanding of the types of inclusion to consider. If you want to have a lawyer from the beginning, check with connections like your accountant or bank. For example, SVB offers recommendations from law firms.
Websites such as LawTrades and UpCounsel can also help you find an independent lawyer. If you want the grip and a fuller range of services from an established law firm, try negotiating a deferred fee agreement, Amerson suggests. Typically, the company agrees to provide free hours, with the understanding that it won`t get paid unless your business reaches a milestone — say, more than $1 million in funding. « States have different requirements for different corporate structures, » Friedman said. « Depending on where you settle, there may also be different requirements at the municipal level. When you choose your structure, you understand the state and industry you are in. This is not a one-size-fits-all solution, and companies may not be aware of what applies to them. « As a small business owner, you want to avoid double taxation in the early stages, » said Jennifer Friedman, chief marketing expert at Expertly.com. The LLC structure prevents this and ensures that you are taxed not as a company, but as an individual. Universal legal services sites like LegalZoom and RocketLawyer offer unified basic tools for a monthly subscription, including premium plans with online or live access to lawyers.
The tools are designed to satisfy the widest possible range of businesses, meaning they don`t focus as much on the specific needs of tech startups as other alternatives. There are, of course, pros and cons associated with any type of business structure, especially if you`re looking for the best business structure to attract investors. While LLCs, sub-companies, and C-Bodies all offer basic liability protection, each varies in terms of impact on factors such as taxation, financing, ownership, flexibility, and attractiveness to investors. The fact that S Corps and LLC require each owner to file a separate tax form documenting the company`s income is « a big diversion for venture capitalists, » says Drew Amerson, director of LexLab, an incubator at UC Hastings College of Law. Choosing the best business structure to attract investors is a very important decision to consider when starting a startup. When an entrepreneur decides to start a new business, he must determine the most appropriate legal structure for the business. Basic choices include sole proprietorships, partnerships, limited liability companies (LLCs) or corporations (C Corporation or Sub-S Corporation). For new businesses that might fall into two or more of these categories, it`s not always easy to decide which structure to choose. You need to consider your startup`s financial needs, risks, and ability to grow. It can be difficult to change your legal structure after registering your business, so do a careful analysis of it in the early stages of starting your business. I formed an LLC that I wanted to use as an umbrella company for a few different business ideas, a few of them are in the tech industry, and one has already started and is just a DBA.
Would it be better to set up each company as a separate entity, even though they all have the same team as my holding company? Articles of Association – They set the framework for how your company`s board of directors, officers and shareholders are to perform tasks and operations. Companies have greater credibility with investors, partners and customers, especially startups. Here`s a look at the pros and cons of the different ways you can structure your business, and where each of them falls in terms of the best business structure to attract investors through traditional sources or Reg A+ funding. Registration allows you to freely transfer shares without the consent of other shareholders. However, most startups restrict transfers to protect the company and shareholders. The right of first refusal, for example, gives the company the right to buy back the shares of an outgoing founder. LLCs can choose how they want to be taxed, but the flexibility they have on the business structure is also their biggest drawback: To help you choose the best structure for your business, I`ve outlined the most common types of businesses. Use these summaries to decide on the best structure for your business now and in the future: if you are an entrepreneur trying to determine the best business structure to attract investors like venture capital firms, angels, HNWIs and/or other traditional private investment sources, or if your goal is to raise up to $75 million through Reg A+ financing, then the C-Corporation is the only way forward. An S company may be ideal for a start-up company that plans to convert to C company within 24 months of its launch, but the founders want to take advantage of the initial tax losses. An LLC is a great choice for a startup that involves multiple founders and doesn`t need external funding or investors to start or grow. Like an S company, an LLC can be converted to a C company at a later date.
And finally, as I said, I would in no way consider starting a business as a sole proprietorship – even if you don`t intend to seek an external investment. The risk of liability of a sole proprietorship is simply too great. An LLC is not the best business structure to attract investors through traditional sources or Reg A+ funding. While there may be exceptions to the rule, most VCs, angels, HNWIs, private equity, or other private investors don`t find the LLC to be a good corporate structure for external investments. And as mentioned earlier, an LLC is simply not a suitable business structure for companies looking to raise up to $75 million a year through Reg A+ funding, which is becoming increasingly popular for companies in the biotech, medical technology, life sciences, and pharmaceutical industries. A C-Corp company is probably the most common corporate structure in the U.S. and has been around for much longer than the others on this list. Large companies generally prefer this structure, and if you want to build a Silicon Valley tech startup that raises venture capital, you should really consider a Delaware C company.