Streetwise Advice: Tips on Legal Structure

Consult an Attorney and an Accountant

Don’t rush out and form an LLC, a corporation, or a partnership without carefully thinking through all of the ramifications, including limitation of personal liability, ability to raise money, initial and ongoing costs, and federal and state taxes. Get your attorney and your accountant to give you specific advice for your situation.

Use an LLC If in Doubt

If after reading the pros and cons on incorporating a business you are still unsure as to whether you should form an LLC, a corporation, a partnership, or a sole proprietorship, chances are you are best off forming an LLC. Unless your business is going to stay extremely small and relatively risk free, you would be “penny wise and pound foolish” not to form an LLC.

Maintain Control

If you are setting up a partnership or investing with others in a corporation, do everything you possibly can to maintain control. Fifty-one percent of a two-person corporation is worth infinitely more than 50 percent. A minority share in a closely held corporation can be worth very little. The majority shareholder may set salaries, determine expenditures, or sell control—do just about anything he or she pleases unless the corporate by-laws state otherwise. Similarly, a partnership agreement that gives one partner decision-making power, rendering the other partner powerless, totally changes the value of the partnership interests.

Death, Taxes, Disagreements

Don’t kid yourself! No matter how harmoniously your relationships with other major investors in a corporation or partnership begin, there will inevitably be disagreements. There might, and probably will, be major disagreements. You need to clearly figure out what will happen when, not if, a major disagreement occurs.

Think It Through Before You Start

I’ve seen plenty of small business owners not give enough thought to structuring their business before plunging into it. I saw one women give a 50 percent partnership to another woman who was essentially going to be her secretary. The value of your share of the business, and the business as a whole, can be dramatically affected by the decisions you make during the formative stages. So weigh the issues carefully.

Consider Your Needs for “Cashing Out”

One important factor to consider in setting up a business structure is how and when you hope to take large amounts of money out of the company. It might seem like a dream now, but suppose your plans all work out. When do you want to cash out, and how?

If you plan on cashing out by selling the firm to a large corporation in five years, for example, a traditional C corporation may suit your purposes fine. If you never plan to sell the business, and don’t plan to have many employees or assets, but still want the protection of a corporate “shell,” then an S corporation or a limited liability company would serve your needs better.

About Bob Adams

Bob Adams is a Harvard MBA serial entrepreneur. He has started over a dozen businesses including one that he launched with $1500 and sold for $40 million. He has written 17 books and created 52 online courses for entrepreneurs. Bob also founded BusinessTown, the go-to learning platform for starting and running a business.