How to pick the best option that will help your vision thrive
When you’re focused on turning a dream into reality, it’s more likely that you’re hunched over your kitchen table working on a prototype or crunching numbers than you are carefully considering how you’re going to file your taxes. It’s just you, and maybe a couple of friends, huddled around a computer screen, not a fancy business meeting in a high-rise conference room.
There are no expense accounts, DBAs, or infrastructure initially, but eventually, you will have to slow down and decide how you want to register your business for the best chance of success.
Unless you have a background in corporate law, how are you supposed to know whether to become an LLC, a C corp, or even a 501(c)(3)? Fortunately, there are plenty of resources to help you make this decision. From online research to consulting with a tax professional, there are many ways you can move forward with selecting a legal structure for your startup.
You have options.
There are at least ten different ways (even if it might feel like 10,000) you can set up your business, but here are five of the most commonly used for small businesses and startups:
- Sole proprietorship (DBA). This could be an easy (and usually free) way to start if you’re on your own with no employees. There’s not much paperwork to declare a sole prop, except that you’ll need to file a Doing Business As (DBA) form with your city, county, or state, depending on your local regulations. During this process, you’ll also look into whether or not you need to license your business. Again, there’s not a lot of hassle here on the front end, but that comes with zero separation between your personal and your business taxes. You also won’t have any personal liability protection. As long as it’s just you, this could serve you well, but you’ll want to consider a different structure once you start paying other folks.
- Limited Liability Company (LLC). This can also be a pretty simple option, especially if you have more than one founder or owner. There’s no limit to how many shareholders you can have, which gives you the freedom to pursue investors. This structure will separate your personal taxes from those of the business and gives you a lot of flexibility if your management changes as you grow. Just be aware that an LLC may not be recognized internationally, they generally can’t go public, and there are recurring fees and forms to keep the LLC active and within compliance.
- Nonprofit or 501(c)(3). If your business exists to support a charitable cause, this could be the way to go. Once you become a 501(c)(3), you won’t be the “owner” anymore, but you can still manage the company. This classification qualifies you for certain kinds of donors, public and private grants, and gives you tax exemptions. You’ll need to stay on top of ongoing compliance paperwork, maintain a functioning board of directors, and meet stringent requirements.
- S Corporation. This structure exists for organizations that may not feel ready for a C Corp status. It limits shareholders to a maximum of 100, all of whom must be U.S. citizens or residents, and requires a board of directors in addition to recurring fees and paperwork to stay in compliance.
- C Corporation. If you’re ever planning to grow big enough to go public, definitely look into this option. You’ll still need a board of directors, and you’ll have administrative requirements to maintain your status, but you’re allowed unlimited shareholders, including founders, employees, and investors. This structure is also recognized internationally.
If none of these seem like what you need, look into the Partnership, LLP, Series LLC, L3C, and Benefit Corporation classifications to see if any of those might be a better fit.
Consider your future.
Ask yourself why you’re taking the step of forming an official company. What purpose do you need your legal structure to fulfill? Think about the following questions:
- How complicated do you want this to be? If you want the easiest option in terms of red tape and paperwork, perhaps a DBA or an LLC is a better option. However, if your company relies on international trade, a corporation status might be worth the headache of all the forms and fees you’ll need to wade through.
- What kinds of legal protections do you need? Which structure provides you with the most protection for liability, naming, intellectual property, supplier contracts, retailer contracts, patents, trademarks, and more?
- How do you want to be taxed? (“Not at all” is not an answer, alas.) Can you allow your personal taxes to stay tangled up with the business, or is it time to separate them?
- How many people “own” the company, and what does that look like? If you have more than one founder, how does the group want the future hierarchy of the company to work?
- Where do you see your startup in the next three, five, and ten years? Which structure provides you with the growth potential and flexibility you’ll need to achieve those dreams?
If you think you’ll just choose the structure that sounds easiest for now and change it later when you’ve learned a little more, that may be risky. There are potential consequences to choosing the wrong structure, from paying more taxes to organizing your business in a way that eventually leads to its dissolution. Consider all the options carefully and go with the structure that serves you and your customers best.
Don’t forget your licenses and permits.
Once you’ve decided on one of the above structures for your business, do some research into the licenses required for you to do business in your city, county, or state. Creating an LLC or registering a DBA doesn’t automatically mean you’re permitted to conduct business, depending on your location.
For instance, if you have customers coming into a storefront, you probably need permits from the fire department and health department, in addition to a sales tax permit and a general business license. Even if you run your business out of your house, there may be a home occupation permit required in your area.
At the end of the day, you do need to acquire a business license. Licensing is a standard that ensures the public is safe doing business with you, whether you produce beauty products or run a research lab. Just as you want to ensure that the restaurant where you ate dinner last night is passing inspections to maintain its license, your clients want to make sure you’re a reputable provider.
Ask for help when you’re not sure.
If doing all this research yourself is getting overwhelming, you’re not alone. Most startups rely on outside advice and help to get off the ground, and it’s always better to double-check with an expert than to be caught unawares without the protections and structure you need down the line.
This is one of the many reasons PGV was formed to help entrepreneurs! We have 180 years of experience navigating the legal ins and outs of doing business worldwide, and our experts know exactly what your startup needs. We want to share that knowledge with innovators working on getting new products into customers’ hands.
We want to come alongside you, discuss which legal structure will serve you best, and walk you through setting that up properly. If you think your startup would benefit from partnering with global experts in corporate law, consider PGV! We’re ready to support new companies and products that help our consumer base.