Starting a business is not just starting another job. A business you create, whether alone or with a team, will be yours to form and guide, with both successes and failures hitting at a far more personal level. On the worst days, and there will be worst days, it’s important to hold on to the core reason you are here – the reason you wanted to start a business in the first place. That reason that sustains you in the worst of times needs to also be what guides you in how to structure your business for success.
Soon after you’ve decided to become the most demanding and critical boss you’ve ever had, you will come across the alphabet soup of potential legal structures (C-Corp, S-Corp, LLC, PLLC, PC, etc) for a business. These structures overlap and areas of differentiation can be subtle, and in the planning phase, it can seem easiest to just close your eyes and pick one. Before day one, how would you begin to know what might be best in the long run?
Ideally, the answer to that question should come from the answer to this one: What do you want from your business? That core reason you are here should be the one defining your initial business structure and management strategy. If it’s not, you may come to feel the business and you are working against each other.
Freedom – working for yourself and answering to no one
- Keep your business structure flexible enough to adjust to varied levels of revenue, and even varied enterprise if your initial venture needs some adjustment.
- Don’t plan to scale too fast – infrastructure that demands more and more revenue to support may become overwhelming.
- A single-member LLC is fast, flexible, and inexpensive to set up and maintain. Just be sure to treat the business’ finances separately from your own and you will enjoy the exhilaration of entrepreneurship while keeping your nest egg safe (assuming you don’t have to personally guarantee every loan you need to take).
Relationships – creating something together with friends or family
- Be realistic from the start about what everyone can contribute. Everyone has different capacity for time, money, mental energy, and emotional commitment. A misalignment in just one category can turn a tight-knit family into feuding factions faster than you think.
- Set up and govern your business in a way that gives all partners a voice. A manager-managed LLC allows multiple owners to align on a single operating framework which puts guardrails on how the business does the work.
- Prepare for one or more members of the company to need a graceful exit, and create an exit strategy that leaves personal relationships intact, even if that means you must sacrifice the business to do so.
Passion – championing the success of your mission (whether it’s a product, service, or method)
- Align everyone in your company to live, breathe, and flourish best when supporting the mission.
- Consider a c-Corp with a board of directors made up of your most passionate members and shareholders – the people who do well when the company does well. A c-Corp allows for a wider and easier distribution of equity and a tighter control over the day-to-day operations.
- Guard against those who would supplant your mission with their own through careful elections and governance, and the right amount of rigor in day-to-day operations.
- If your mission qualifies, there are many non-profit options for business structures that may allow you to unlock charitable giving and investments.
Empire – growth and expansion
- Be prepared to take on the risk of running at a deficit and giving away chunks of your company to investors who may or may not share your values.
- Plan ways to trade equity without trading control through multiple stock classes and series.
- Consider a Delaware c-Corp, formal board of directors, and an accountable set of officers who are driven by your same unquenchable desire to meet KPIs and grow your company. Delaware is by far the preference for institutional investors because of its business-friendly filing requirements and sophisticated business judges.
- Create a framework for scaling before you have outgrown your current circumstances, not after.
The truth is that any legal entity can support your wants if you run it accordingly. And for relatively small fees, most entities can be transitioned from one structure to another as they grow, if the initial structure turns out to no longer be the best fit. Under any entity, your business has the potential to sustain you or to feel like a burden you can’t escape – and understanding your core motivation can help keep the former from becoming the latter. If you do the work upfront of defining what you want out the business, the rest falls into place.
