6 Steps to Choosing an Entity Structure for Your Business

Choosing the most appropriate entity structure is an important decision that establishes a foundation to support the company's growth and operational effectiveness as it matures. 

An appropriate entity structure provides an important foundation for your business. In addition to limiting potential liability and helping you develop appropriate tax strategies, the right entity structure can help your company safeguard its intellectual property, attract outside investors, and reduce potential disputes as your venture moves through the later stages of its lifecycle. 

There are different types of entity structures, each offering distinct advantages and potential drawbacks to growth-stage companies. Evaluating your options carefully is important because it's easier and more cost-effective to make the correct choice early, instead of revising your entity structure later. 

Given the potential challenges of making the best choice and the importance your entity structure can play in your company's success, it's important to obtain appropriate legal, financial, and tax advice about your options.

Company Structures

One of the first decisions the business founder has to make is the appropriate corporate structure. Creating your company as an independent entity can help founders shield their personal assets from potential liability claims, protect intellectual property, and provide tax benefits. 

To form a company, consider the following steps: 

1. Decide whether a limited liability company (LLC) or corporation is best suited for your company. Investors generally prefer to invest in corporations, but there may be advantages to forming an LLC in some circumstances. 
2. Review tax considerations with a professional adviser. In broad terms, corporate taxes are due at the entity and shareholder levels, while an LLC may choose to pass taxes through to its owners. 
3. Conduct trademark and registration searches to be sure your desired company name is not being used by an organization offering similar products or services. 
4. Enlist an attorney to help with the incorporation requirements and related documentation that will need to be filed with the state in which you incorporate (which may not necessarily be the location where your company is based or where it operates). 
5. Work with your advisers to determine whether, and how, equity will be offered to employees. 
6. Consider your growth plans and exit strategy, and discuss with your advisers whether those factors can affect your initial entity structure decisions.

It is also critical that you and your co-founders develop an operating agreement to outline issues such as equity arrangements, intellectual property, or IP, ownership, employment terms, and other items that, without an agreement, later may be subject to litigation. 

By considering these issues at the earliest stages of your company's lifecycle and developing an appropriate entity structure, you can help set the stage for your venture's future market growth and success and pave the way to an attractive exit strategy that helps you maximize your company's value. 

Decimal

And Decimal can help you be prepared with up-to-date financial information. Decimal is the new way to manage accounting for small business owners who want to return time back to their day and outsource accounting operations. We take bookkeeping off your hands by leveraging intelligent automation, a custom financial dashboard, and a professional bookkeeper-in-the-loop. Contact Decimal today to learn more about how we can improve your accounting operations so you can focus on scaling your business. 

‍