When you have a great business idea and you think the market is prime for introducing your idea to the general public, it’s tempting to go full steam ahead and start making money. Before you dive headfirst into the world of commerce, though, you need to consider whether you need to put a legal structure in place for your business or whether it’s acceptable to hold off on that. This blog will help you understand the optimal timing for structuring your company.
Consideration No. 1: What are Finances Like?
Money is thin for most startup owners, and that’s understandable. Many entrepreneurs try to bootstrap their startups or figure out ways to launch the business with little to no startup capital on hand. If this is the case for you, then waiting until later to choose a legal structure for your business is fine. Conversely, you likely want to incorporate or officially form your business entity if there is a good amount of startup capital for your new business.
Consideration No. 2: What are Your Long-Term Goals For Your Business?
If you are perfectly content with being a solopreneur and carving out your small niche in the business world, you might feel comfortable having a sole proprietorship or DBA name to conduct your business. Other companies with different business models (like Software as a Service) that need to scale the operation fairly quickly should put in place a business structure that allows them to reach their short-term goals. SaaS (Software as a Service) companies are illustrative of a type of business that might need to make a big splash in their industry or secure a lot of venture capital funding right away.
Consideration No. 3: How Much Risk Are You Comfortable With?
Many small business owners are attracted to the limited liability company (LLC) structure for a few reasons—one of which is that LLC members generally enjoy limited liability when it comes to their personal finances. If you want to know more about the hybrid structure of the LLC, this link to the IRS’ website has some useful information. On the other hand, sole proprietorships are much easier to set up and maintain; however, they make owners personally vulnerable to judgments against the company.
The industry your company is involved in also heavily dictates the structure for your company. Construction companies and prime contractors, for example, have numerous liabilities due to the potential for on-the-job industries. It is imperative for owners of these types of companies to set up a company that significantly reduces their personal liabilities.
Conclusion
Business owners have so many considerations to address when deciding on a legal structure for their company. While the three considerations covered in this blog are extremely important, there are many more pieces to the puzzle. If you are interested in learning more, Lockhart IP would like to send you a five-step checklist for legally setting up your business. You can access this free resource here or, if you want to discuss your options with our team, get in touch with us here.