Posted by Asako Tsumagari on 14 Aug 2007,
(5) Comments — Setting Up
There are a number of different structures to choose in incorporating your start-up, e.g. sole proprietorship, LLC, C-Corp. You can find good books to learn their tax and legal implications, like this one on Amazon: Tax Savvy for Small Business: Year-round Tax Strategies to Save You Money.
But not many discuss them from business perspectives. This is my personal views of the business situations that are appropriate to choose a certain structure. (I only cover sole proprietorship, LLC and C-Corp here, but there are also S-Corp and Limited Partnership. Please make sure you study them carefully as well)
So you should really think through, what structure would make the most sense for your concept. If your concept is on-line distribution of a low-tech proposition, many cases, you do not need to raise external money. Maybe, you can self-fund $10K in building an inventory and website, and start making revenues and profits. If so, LLC is probably a good choice. You can get a good tax benefit, you are protected from liability issues, and you do not need to have cumbersome corporate governance processes with the Board and Shareholders.
Basically, going into C Corporation is a different world from sole proprietorship or LLC. It will require the most established governance, reporting, and management structure. But if your business concept requires significant technology investment, capital investment, then, you may not have a choice than raising external capital. To raise capital from VCs or to aspire for the future corporate acquisition, C-Corporation is the choice.
In most States, if you are setting up a sole proprietorship or LLC, you do not need to hire a lawyer. In Washington State where I am located, I could do it in a day. But of course, it is important that you do a detailed study on tax, legal implications, before you do anything. What I wrote here is from purely business perspectives, but tax and legal matters could complicate your life.
In the coming blogs in this category of “setting up”, I will further discuss the followings:
- Sole proprietorship v.s. LLC
- LLC incorporation process
See more practical business tips.
Comments for "Choosing a corporate structure"
31 Aug 2007 at 10:41 AM
You’re right, sole proprietorships are easy. With our businesses, we first started out with sole proprietorships. As time passed, we realized we wanted more protection, and now have a S Corp and an LLC. I studied the advantages and disadvantages of all types of structures, discussed it with our accountant and attorney,and these work the best for us.
I think it’s important for any individual, who’s thinking of starting a business to self educate, and to also talk to trusted professionals before spending money on what could be the wrong entity for their business.
31 Aug 2007 at 11:21 AM
Thank you, Barbara, for insights from your experience. I agree it is very important for anyone to do a good due diligence on this matter. I am finding often the hidden implication of the original structure on the business. Every business seems to have its unique circumstances.
31 Oct 2007 at 10:46 AM
LLC’s are the way to go in California at least for companies like ours - cheapestees.com
Much less red tape than Corps. all the way around.
31 Oct 2007 at 09:08 PM
I agree, that is also the case in Washington State. It is so easy to set LLC up as well, and there’s no complex governance issue needed.
Your website looks great, by the way. Your products - while they are simple T-Shirts - have style and character.
05 Aug 2008 at 05:11 AM
An additional point to consider is the closure of an unsuccessful business. Unfortunately not all new businesses make it past the first year. As a sole proprietor you can simply stop doing business, deal with you own personal finances and pay the tax. As a limited liability company you have to close the company and prepare final accounts. For this reason many new businesses start as a sole trader before forming a company.