How should an entrepreneur structure a new business?
To help you develop a new business structure, we asked business leaders and entrepreneurs this question for their best tips. From determining your level of involvement to adopting innovative business structures, there are several tips that may help you develop your new business structure.
Here are nine tips for developing a new business structure:
- Determine Your Level Of Involvement
- Separate Intellectual Property And The Business Itself
- Just Structure It
- Determine How Personal Factors Affect The Business
- Consider Your Future Funding Needs
- If You Need Investment, Start With A C-Corp
- When In Doubt, Go For An LLC
- Don’t Split It Evenly
- Adopt Innovative Business Structures
Determine Your Level Of Involvement
When structuring your new business, it is important to determine the level of involvement and control you would like to have in the business. Are you coming into business with a partner or family member? Do you want to be involved in all day-to-day operations? Do you want total control of the business? Answering these questions will help you decide if you want to structure your business as a C-Corporation and sole proprietorship or something like an LLC.
-Henry Babichenko, DD, Stomadent Dental Lab
Separate Intellectual Property And The Business Itself
When creating and structuring a new business, an entrepreneur should consider separating their intellectual property from the business itself. Structuring the business in this way protects valuable pieces of intellectual property that you don’t realize are that important until they try to get taken away in some kind of lawsuit. Your company phone numbers and web address are two great examples of intellectual property that are worth protecting! If your company owns your telephone number or website address, a competitor could actually legally take over your phone number and website and benefit from your great reputation if you don’t structure your business in a way that would prevent that from happening if a lawsuit unfolds.
-Jonathan Cohen, Generated
Just Structure It
I can tell you that for the first four years of being a freelancer, I did not structure my business. It wasn’t until I hired my first employee did I take the time to structure the business. In hindsight, that was pretty risky. If you are a freelancer, take the time to file as an LLC to separate yourself from the business. Plus, it’s more professional to submit a W-9 with an EIN (employer identification number) versus a social security number. Just structure it.
-Brett Farmiloe, Markitors
Determine How Personal Factors Affect The Business
The structure of a business depends on the unique life situation of the entrepreneur. For example, an entrepreneur may be considering relocating overseas and becoming an expat. In that case, a business would need to be structured with an eye towards international cross-border transactions in each country to comply with business and personal tax regulations. The bottom line is that each entrepreneur’s life situation is unique and can impact the financial success of his or her company. Always consult with an international tax attorney before structuring a new business overseas to create a tax strategy to avoid unnecessary taxes and potential penalties and interest charges.
-Jason Kovan, International Tax Attorney
Consider Your Future Funding Needs
Many of the business structure decisions you will make at start-up will affect your ability to raise capital later on. Try to envision the type and amount of outside funding (equity or debt) that you will need to grow your business three or five years down the road. For example, if you may be seeking traditional debt financing through the Small Business Administration (SBA 7A loans) or a bank, then any owner of at least 20% ownership in the company will be required to sign a personal loan guarantee with the SBA and the bank. If you have co-founders or other investors who do not want this liability then their ownership share will need to be limited. And, the truly best advice at this early stage is to consult with an attorney; it will be funds well spent.
-Thomas Schumann, Center for Entrepreneurial Innovation
If You Need Investment, Start With A C-Corp
It is simple and logical to want to start your business as an LLC. You're not sure how successful it will be, and it is the most beneficial from a tax perspective. However, if you ever plan to raise capital or give stock options to your employees, it is best to start as a C-Corp, preferably in Delaware. Converting from an LLC to a C-Corp is not overly difficult, but it will take time and money and cause unnecessary stress when you could have just started as a C-Corp.
-Will Pearson, Scalero
When In Doubt, Go For An LLC
As long as you don’t plan to raise venture capital (in which case you should be a Delaware C-Corp—as that is what VCs prefer for fundraising), when in doubt, simply start with an LLC. LLCs are simple from an admin perspective, and they are easy to create. With an LLC, you can always elect to be taxed as an S-Corp down the road, or, once your business really takes off, you can change into a new structure. The reality is, not all new businesses catch—so an LLC is a very simple and "good enough" way to get started right away that you can always update down the road.
-Sam Shepler, Testimonial Hero
Don’t Split It Evenly
If you have partners, then there should always be one person with a majority share. Splitting 50/50 or equivalent is a recipe for disaster, and you will eventually reach an impasse where you disagree on a decision, and nobody wants to give in. Giving someone 51% ensures the company has a true leader, and while it won't reduce the risk of infighting around decisions, it will help you move forward with minimal delay.
-Quincy Smith, TEFL Hero
Adopt Innovative Business Structures
As an entrepreneur, you have the ability to build your company the way you always wanted an organization to run. With that being said, try to stay away from traditional hierarchy and departmental setups. These methods of running an organization are dated and not conducive for attracting solid talent to your company. Using a web or holacratic structure will allow you to create a more creative and communicative work environment. These structures allow people to feel more like they are a part of the organization and that their opinion matters. This is essential for ensuring your start-up has great people pushing the organization forward that will stick around.
-Mark Smith, UAT