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Every week, right here at S.W.E.A.T. Equity, we serve you a meticulously crafted, step-by-step guide that embodies the essence of what it takes to transform a dream into a prosperous business. The core of our philosophy? Smarts. Work. Effort. Action. Time. Together, these ingredients forge the S.W.E.A.T. that underpins true entrepreneurial success.

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Let's Get Organized!

This week we touch on how to organize your new company, as in its legal structure. Should you be a sole proprietor, an LLC (limited liability company), an S-Corp, or something else? It’s one of those decisions that can be crucial and complex, but also simple and easily fixable if necessary. The main reason you will want to figure this out in the early stages of your business journey is to protect yourself personally, for liability and tax purposes.

Now, we are in NO WAY tax or legal specialists. So, consulting a professional is always a good option. However, most states make the corporate organization process easy, and inexpensive for you to do on your own. Also, the type of structure that makes the most sense when you start out isn’t always the structure that makes the most sense once you grow. For example:

Apple Inc. started in a garage as a partnership between Steve Jobs, Steve Wozniak, and Ronald Wayne. Wayne sold his share back shortly after, and the company later incorporated to become Apple Computer, Inc., eventually dropping "Computer" from its name.

Nike was initially a partnership when Phil Knight and Bill Bowerman began selling shoes from the back of Knight's car…

…The company grew beyond its ‘out the trunk’ roots and changed the legal structure accordingly.

There Are Always Challenges

Deciding on the appropriate structure for a new venture is critical but can pose several challenges for first-time entrepreneurs.

Limited Knowledge and Experience: First-time entrepreneurs often lack the experience or knowledge to understand the nuances of different business structures and their implications.

Financial Implications: Different business structures have varied tax implications. Understanding these can be challenging without the appropriate financial background.

Liability Concerns: Weighing the potential liabilities and risks associated with a business and then choosing a structure that offers the right level of personal protection can be daunting.

Complexity of Setup: Some structures are relatively easy to set up, while others, like corporations, can be more complex and might require more legal and administrative work.

State-specific Regulations: Business structure regulations and benefits can vary from state to state. For those considering registering in a state other than where they primarily operate, understanding these differences becomes crucial.

Cost Implications: There can be varying costs associated with setting up and maintaining different business structures. Balancing the benefits against the ongoing costs is a challenge.

In the face of these challenges, first-time entrepreneurs should consult with business advisors, mentors, accountants, and lawyers to ensure they make informed decisions about structuring their venture.

It’s Kinda Important, Bruh

One of the primary considerations for choosing a business structure is personal liability. Structures like sole proprietorships can expose owners to personal liability for business debts or legal claims, while others, such as corporations, can provide a shield between personal and business liabilities.

Different business structures are taxed differently. Making the right choice can have a significant impact on the amount of taxes a business needs to pay. For instance, an LLC might offer pass-through taxation, while a corporation might be subject to double taxation (though there are ways around this with structures like S-corporations).

Having a specific structure, especially a formal one like a corporation, can also lend more credibility to the business. It can signal to clients, suppliers, and investors that the business is serious and committed. Certain structures are more attractive to investors. If a startup is looking to raise venture capital in the future, being structured as a corporation, especially in a familiar state like Delaware, might be beneficial.

Lastly, the benefits and regulations associated with business structures can vary by state. Knowing these can help a startup leverage specific state benefits or avoid undue burdens. Here’s where consulting an expert and doing your research helps.

In essence, knowing how to structure a new business is fundamental because it affects nearly every aspect of the business, from day-to-day operations and legal protections to long-term strategy and exit plans. Making an informed decision early on can save time, money, and potential legal hassles in the future.

Don’t F*@k This Up!

One of the primary reasons people do this wrong is a simple lack of understanding. Many new business owners aren't familiar with the nuances and implications of different business structures, such as sole proprietorships, partnerships, LLCs, and corporations.

With so many options and each having its own set of rules, tax implications, and legal liabilities, the process can seem overwhelming. Some may choose a structure that seems easiest at the outset without considering long-term implications.

Some entrepreneurs might underestimate the potential scale or risk of their venture and opt for a simpler structure. Conversely, others might over-structure too early, incurring unnecessary costs and complexities.

Particularly in businesses started with friends or family, there might be an over-reliance on verbal agreements and mutual trust, leading them to forgo formalizing a more appropriate business structure.

And let’s face it, procrastination is the beast that beats most potential billion-dollar business ideas before they even get going…

Some entrepreneurs might delay the decision, running their operations as a default structure (like a sole proprietorship) until they "find time" to restructure, which might never happen or might occur too late.

Super Professional Like

Key Takeaways

For complex situations, consult a professional

DO your research

Taxes, TAXES, Liability, LIABILITY

Get professional help

Step-by-Step Guide on How To Structure Your Business

Step 1: Understand Your Business Goals

Start by outlining your business's objectives and what you expect in terms of size, liability, taxation, and succession.

Step 2: Familiarize Yourself with Basic Business Structures

There are several types of business structures: Sole Proprietorship, Partnership, Corporation, Limited Liability Company (LLC), and more.

Step 3: Consider Liability Implications

Evaluate the potential liabilities your business might face. This will influence the kind of structure that offers the protection you need.

Step 4: Examine Tax Implications

Different business structures have various taxation rules. Some offer "pass-through" taxation, while others might double-tax earnings.

Step 5: Think about Future Needs

Consider scalability and the ease of bringing in investors or partners in the future.

Step 6: Consult with Professionals

It's always a good idea to consult with legal and accounting professionals before making a final decision.

Step 7: Register Your Business

Once you've chosen a structure, ensure that you register your business with the appropriate state and federal agencies.

Types of Business Structures: Pros and Cons

Sole Proprietorship

Pros: Easy to set up, direct control, tax simplicity.

Cons: Personal liability, harder to raise capital.

Example: Many freelancers or self-employed professionals might start as sole proprietorships.

Partnership

Pros: Simple to establish, shared responsibility, easy tax preparation.

Cons: Joint and individual liability, disagreements can arise.

Example: Ben & Jerry's started as a partnership between Ben Cohen and Jerry Greenfield.

Corporation (often C-Corp)

Pros: Limited liability, easier capital-raising, corporate tax rate.

Cons: Double taxation, expensive to set up, lots of regulation.

Example: Apple Inc. is an example of a corporation.

Limited Liability Company (LLC)

Pros: Limited liability, flexibility in taxation, simpler management structure.

Cons: More complex than a sole proprietorship, state-specific regulations.

Example: Many small to medium-sized businesses prefer the LLC structure for its flexibility.

When choosing a business structure, it's essential to consider your business's unique needs and consult with professionals. The right structure can offer protection, tax benefits, and other advantages crucial for long-term success.

Book Recommendations

The Founder's Dilemmas by Noam Wasserman

LLC vs. S-Corp vs. C-Corp by Greg Shields

Start Your Own Business by The Staff of Entrepreneur Media

Helpful Resources

Small Business Administration (SBA)

SCORE

Local Chamber of Commerce