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O ne of the most important decisions facing your startup is not choosing what consonant to leave out of the name such as Snappr, Letterboxd and DealSpotr or what new, obscure business name you'll invent such as Zoosk, Skift, Twilio or Piwik.
Surprising, we know.
This important decision is actually a bit mundane, but easy to do. It's actually making sure you choose which business entity to use when incorporating your business. This simple step can sometimes mean make it or break it for a business if you find yourself faced with liability or a partnership gone wrong.
You probably already know that your startup business needs to have a corporate structure, right? Incorporating your business helps protect your personal assets and lets you open a business bank account to borrow money in your business’s name. There's also a lot of additional other important steps that come with different incorporations. And, the choice of business entity can also affect the future growth and ultimate destiny of your company. If you want to grow big and build the next billion-dollar “unicorn” startup, you need to choose the right business entity to fit those plans. If you want to stay small and divide up your profits between just a few co-founders or shareholders, there are options for that, too. It all depends on what you envision for your business.
Here are the main types of business entities you can use to incorporate, along with some advantages and disadvantages of each:
A sole proprietorship is the most basic type of business entity. With a sole proprietorship, your business is unincorporated and is operated by one person (you).
In almost all cases, a sole proprietorship is not the best choice for a startup business. If you want to limit your personal liability (and perhaps enjoy some tax savings) while boosting the credibility of your business, you should choose an LLC or other formal business structure.
A limited liability partnership (LLP) is a business entity that can be set up for a business that involves more than one member/owner. It has similar features to an LLC.
If you are forming a professional services firm with one or more business partners and your state requires businesses in your profession to use an LLP, then this business entity might be the right choice. Otherwise, an LLC will likely give you the same advantages of an LLP, but with more flexibility (see below).
Forming an LLC is often a good choice if your company is just getting started and you’re not sure how fast your business is going to grow.
An LLC can be a good choice for the early days of your startup, but you might need to switch to an S Corporation or C Corporation as your business grows.
As your startup starts growing, you might think about transitioning into a slightly more complex business entity like the S Corporation. Or maybe it's best for you to start here... up to you to decide.
The S Corporation is a good choice if you’re comfortable with your startup’s growth leveling off at a certain point. If you want to grow really large, you'll probably need a C Corp.
The C Corporation is the business entity for publicly traded companies and high-flying “unicorn” startups. If you want to go public, this is what you need.
Starting a C Corporation has extra tax complications and compliance requirements, but it’s likely the right choice if you plan for your startup to grow big and go public.
Whatever your choice, our advice is to choose your business entity wisely. The right business entity can help your company grow with the correct structure. As your startup evolves, be aware that your choice of entity might need to change too. After all, your business entity isn’t just a name on a bank account; it’s a vessel for your startup's hopes, dreams, and hard work.
Ben Gran is a freelance writer from Des Moines, Iowa. Ben has written for Fortune 500 companies, the Governor of Iowa (who now serves as U.S. Secretary of Agriculture), the U.S. Secretary of the Navy, and many corporate clients. He writes about entrepreneurship, technology, food and other areas of great personal interest. Read more
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