The next logical step in your business startup and the entrepreneurial journey is the legal structure. This decision is a colossal one and shouldn’t be taken lightly, either.
Remember Brenda? She decided to start her bakery business, rooted in her incredible success as a hobby-baker during the course of the pandemic with friends and family. She knows it’s important to set up a business structure, but she’s not familiar with the process, and it’s kind of intimidating. While she explores her legal entity options online, she continues to bake for her friends and the new referrals that continue to pour in. However, what Brenda isn’t thinking about right now are the risks. What happens if someone has an allergic reaction to one of her ingredients? Is she selling her baked goods with proper labeling? Does she have insurance or legal protections in place? And the list goes on and on…
Before Brenda even thinks about taking her baked goods to the masses, she needs an official company structure. If you’re like Brenda, you’ll need a structure, too. And yes, this is the part of the company startup conversation where things get a little tedious. We’re not lawyers here, but we certainly have some stories to share that you’ll want to hear. The very heart and soul of your new business venture depends on your ability to set up the ideal business structure.
If you get anything out of this conversation, get this:
The business structure you decide on now will influence your company tax responsibilities, your day-to-day operations, what personal assets are on the line, and the overall protection of the company and yourself.
There is a very right and a wrong way to go about turning granny’s baking recipes into a goldmine. And the fork in the road you face now can determine success or failure in this venture.
We’ll sort the junk advice from the yawn-worthy legal jargon to help you better understand precisely what you absolutely need to know to move forward with the best structure for your new business. And anyone ready to embark on this new endeavor, regardless of the product or service, needs to explore these key structure elements.
The Small Business Administration offers a comprehensive menu of resources, free and paid, to entrepreneurs like you. It’s an excellent place to start exploring when you’re a little fuzzy on the details about business structures. Browse these types and maybe highlight a few that you think might sound like your ideal situation.
Here is a “CliffsNotes” version you can print out to help your consideration process:
Sole Proprietorship – This is a type of enterprise owned and run by one person and in which there isn’t a legal distinction between the actual owner and the business entity itself.
Partnership -A partnership is an arrangement where more than one party, known as business partners, agrees to cooperate to advance their mutual interests.
LLP – This is a partnership in which some or all partners involved (depending on the jurisdiction) have limited liabilities.
LLC – This describes a business structure that can combine the pass-through taxing of a partnership or sole proprietorship while enjoying the limited liability of a corporation.
Series LLC – This version of an LLC is a form of a limited liability company that provides more specific liability protection across multiple “series,” each of which is generally protected from liabilities arising across a variety of other series.
Corporation – This more common business structure is any corporation that is taxed separately from its owners.
B Corporation – Certified B Corporations are a newer kind of business structure option that balances both purpose and profit. These are legally required to report the impact of their decisions on their employees, customers, vendors, the community as a whole, and the environment.
Close Corporation – This is a corporation that does not exceed a statutorily defined number of shareholders and is not a public corporation.
Non-Profit Organization – These refer to any legal entities that have been incorporated under the law of jurisdiction for purposes other than making a profit for its owners or associated shareholders.
Cooperative – This refers to an autonomous association of people who are united voluntarily to meet common economic, community-based, social, and cultural aspirations through a jointly-owned enterprise.
Note: An S-Corporation is commonly thought to be an actual legal structure when in reality it’s not. It’s a TAX structure. In our future blog topics, we will talk about taxes.
Like every snowflake and fingerprint, new businesses are entirely different in regards to how they want their agreements to work, bank accounts set up, etc. From the owners who found them to the types of products and services they offer, there are countless ways to internally structure the entire entity regardless if you choose an LLC, C-Corp, etc. So, for someone to tell you which one is better or not without knowing exactly what you’re trying to achieve is an idiot. Tread carefully when consulting with people about these topics who aren’t experts.
We found some sound advice from a fellow business owner. In an interview with Entrepreneur, Mark Kalish says deciding your business structure should not be taken lightly. And this Wisconsin co-owner of EnviroTech Coating Systems also reminds new business leaders that each individual circumstance warrants a different structure. The best way to find your way through this decision-making process is with the help of trusted professionals who understand your mission and goals.
But who are those trusted professionals, really? Sure, you could hire a high-priced attorney to sit down with your business plan, but that isn’t always a realistic proposal. Let’s face it; starting out means your budget is likely pretty slim. But there can be great support from other professionals, including the SBA, the Service Corps of Retired Executives (SCORE,) and accountants who have a strong command of tax law.
As you explore your options, be prepared to ask yourself and your expert these four questions:
- Which business entity allows for the most ownership control?
- Which business entity offers the fewest ownership risks?
- Which business entity makes the most business sense for tax purposes?
- Which business entity makes it easier to raise capital or take on foreign investment?
Our own wise counsel does want to also suggest that if you’re a serious business owner, with a legit idea and a goal to take your company to great levels of success, then DO NOT incorporate as a sole prop. Sole proprietorships are for hobbyists and non-serious business people. If you feel you absolutely “need to,” then you can use this structure in the very beginning, but only for a limited period of time.
Attention Construction, Electricians, Plumbers & The Like! Don’t Forget to Check Your State’s Requirements
For service-based businesses especially, the selection of a legal structure doesn’t stop here. For the vast majority, you’ll need to also acquire certifications and permissions in order to render your services to your customers legally. Each state will have outlined licensing must-haves based on your specific niche and training. HVAC technicians will have to hold certifications to carry freon. Pest inspectors need to register for authorized use of particular chemicals. And in Ryan’s case, construction businesses will have a roster of city, county, or municipal permits to secure before building. The last thing a new business like yours needs is a lawsuit or steep fines for not having acquired your proper certifications, licenses, and/or necessary permits. This can put you out of business overnight.
Remember Ryan, who’s dotted all his I’s and crossed all his T’s, ready to embark on his new journey into self-employment as a construction contractor. He decided that an LLC makes the most sense for his business structure. If you want to learn the precise steps/guide/walkthrough Ryan took to register his business, we’ve discussed his process in another blog.
Even if your product or service is deliverable outside of your state, where your business calls home will still govern your structuring process.
One primary aspect to devising your ideal business structure is mitigating unnecessary risks. Think financial protections along with personal assets and health, too. The other tool in your business startup toolbox for these types of protections is insurance.
There probably isn’t a more drab topic to explore, especially if you’re unfamiliar with business-related insurance plans. But trust us. Business insurance is an absolute must-have to avoid company-ending catastrophes. A single event, unforeseen incident, or pocket-draining lawsuit can translate to bankruptcy and business disaster. Here are a few traditional forms of insurance coverages available for businesses:
- General Liability
- Commercial Property
- Business Income
- Professional Liability
- Workers’ Compensation
- Data Breach
- Commercial Umbrella
- Commercial Automotive
Of course, not all of these insurance plans will be a necessity for your new company. However, it’s best to talk with an insurance professional about your options to find that happy medium with risk protection efforts that fit your startup budget.
Right now, you’re probably excited to get started. And you should be. You’re here now because you have a vision of success.
Don’t lose sight of that ever-important vision when you’re structuring your company. Think beyond today and make sure that whatever entity you create is one you can grow into down the road. You might not have additional employees now, but if, in your mind, you expect to be hiring five years from now, take that into consideration in your structure decision. Having to restructure your company later can be costly if you’ve not properly planned for growth and scaling right now.
When it comes down to picking which form of incorporation, there are many things to consider, including taxes, protections, control, and ownership (among others). We’ve provided just a few examples here to help get the ball rolling.
Stay tuned as we continue to follow Brenda and Ryan on their respective journeys and offer the juicy nuggets of wisdom you need to take the next new business step. And like we said, we’re not lawyers. But schedule a FREE consultation with us today, and we’ll help you navigate these next critical steps.