Choosing the Right Business Structure, Where to Launch, & Other Legal Questions
Starting a business creates a lot of questions for you as the owner. What should you sell? Who are your customers? Will this even work?
But there are other essential questions that you need to find answers to before you even open your (physical or virtual) doors. Let’s look at a few of them and get you on the path to the right answers.
What’s the Right Business Structure for My Company?
This is a great question with no easy answer. Let’s review the primary structures for small businesses, and you can determine for yourself which is the best fit.
A sole proprietorship is what you operate as if you don’t elect a specific business structure. It’s the default. It’s also the one where you’re the least protected. If, heaven forbid, your business gets sued one day and your company can’t pay the legal fees or creditors, they can come after your personal assets. So you put everything you’ve worked hard for on the line simply by not choosing a more structured business formation.
One popular option for entrepreneurs is the S corporation. While the S corp requires a bit of formality (there’s some paperwork you have to turn in each year, and you have to hold annual Board meetings), many small businesses like it for its tax benefits and asset protection.
Then there’s the LLC. Another great option, it also separates your personal assets from that of the business. And the LLC, as well as the S corp, provide what’s called pass through tax status, meaning that you file your business profit and loss on your personal income tax statement.
You’ll have to look at your business’s specific needs and choose the structure you think will work the best for you.
Where Should I Launch?
Another important question is where you should start your business. If you want to start it where you live, that’s easy enough. But if you want to take advantage of a state with a better small business environment or lower taxes, do some research.
When it comes to where businesses incorporate, I’ve seen a lot go for Nevada or Delaware. Nevada appeals to businesses because it has no state corporate income, franchise, or personal income taxes. And Delaware is attractive because it’s very small business-friendly.
But I recommend that, unless you have an office in one of these states, you stick to your home state to incorporate and operate from. Having headquarters elsewhere, you’re considered a “foreign”business, and therefore have more hoops to jump through. You might save a little in taxes, but trust me: you’ll pay it elsewhere in headaches.
Should I Offer Stock?
Many startups face this question early on. Offering stock is great if you want a cash infusion to help you grow rapidly. On the other hand, you’re now beholden to shareholders who will have an opinion about everything you do.
How do you want to run your business? With the help and (sometimes unwanted) input of others? Or on your own completely? If it’s the latter, look at other funding options, like a small business loan, crowdfunding, or bootstrapping.
It’s important that you answer these challenging questions before you launch so that you can build your business plan around them.