Defining your Startup in Legal Terms: Which Structure you should Choose

Everyone loves successful entrepreneurs. They are usually very charismatic, action driven individuals with their mindset completely focused on doing good business. As friends and members of family – they are generally admired and supported by all. As visionary leaders – they can count on their employees to follow them more rigorously than they would ever follow a manager of any corporation or a multimillion dollar company. The general public loves watching them give those same companies a run for their money with their inventive approach, tireless dedication, and vigorous diligence.

Because of their prosperous self-motivated ventures, more than 60% of the entire US economy actually depends on those same entrepreneurs and SMB owners. Startups provide jobs, feed families, and secure profit on a global market, as well as great ideas and ingenious business models that others love to replicate. Almost everyone would love to be a part of a successful Startup.

Not surprisingly, with the emergence of so many entrepreneurs struggling to thrive in the contemporary world of business, a great arch nemesis appeared from the mist of that same profit – the Law.

Although the representatives of the law usually don’t come in shiny armors and with a speech impediment like the referenced Sylvester Stallone from his 1995 movie Judge Dread, they do come equally terrifying and determined to bring you downtown. In fact, they come suited up and are very eloquent.

The problem is that most entrepreneurs don’t have the time to focus on anything else but their own jobs if they want to do keep delivering profit. So while the governments keep averting their attention from this issue and blame it all on SMB’s and Startups, plus giving very little initiatives, entrepreneurs keep struggling with this difficulty on a global scale. This is why it is very important for every startup to clearly define its legal entity in order to avoid at least some of the legal troubles could stand in the way of their further progress.

Building a Structure

Since we are all aware that a road to success of every startup is exasperating and filled with legal quandaries, including patent trolls and your closest friends, be advised that you should start building that fortress of documents as soon as possible to keep all troubles away. Although you should get a legal advice regarding your particular branch of industry, country and market that you are targeting, the general choice of many startups is to find their resort in the Limited Liability.

The Not-so-definite Choice of Limited Liability Company

This type of a structure is a favorite choice among entrepreneurs since it is the most honest model that you can employ. By labeling your Startup as an LLC, you are clearly sending a message that you are not personally responsible for whatever happens to your company, be that debt or any other liabilities. Although this model differs from one country to the next, in general, it is a hybrid entity which combines the features of a sole proprietorship and corporate characteristics. In terms of taxes, this model is popular because of its flow-through taxation system. But before we pronounce this model as an absolute winner, let’s examine other benefits and disadvantages of the LLC legal entity.

If you expect to face any accusations regarding trademark infringement, employment issues or privacy violations, etc. – LLC is a model that you are looking for. Lawsuits and taxes come easy when you can hide behind a board of partners that share your liability and can state that they were unaware of any contravention.

However, if you are looking to find some outside sources of funding – you should know that investors don’t care much about LLC entities. That same feature which protects your tax-flow complicates theirs. If you are proposing an investment to any potential financier, the last thing that he, or she, wants to hear that you are counting on a personal level of involvement regarding taxes, and actually expect from them to commit on that level as a shareholder. Not only that, but some of them are actually unable to help you, since their personal tax program is tied up in other ventures. So in that case, you should probably look for a C, or a corporate solution.

Corporations are subjected to double taxations, and individuals have to pay for their personal income as well as in terms of their companies. LLC structure simplifies this feature by simply reporting all profits and losses on the individual owner’s tax returns. Additional problems may occur if one of the shareholders, god forbid, passes away and is no longer a part of the structure. In that case, you have to reorganize your company’s legal entity again.

The Advocate and your C-Corporation

Be advised that while LLC may cause difficulties when you are searching for funds, it’s not making your Startup bulletproof for every other legal trouble that might come your way as well. This is why single entrepreneurs often choose C Corporation model, but with a little addition that is equally recommended for any legal entity – a business lawyer.

A proper legal representation means a great deal to entrepreneurs. In fact, as soon as you discover a scalable business model, the next stop should be a business attorney’s office. Although your current plan may or may not involve certain assets or liability, an attorney will help you determine the progress of your business model and potential issues that might come along with an expansion.

Although this Al Pacino/Keanu Reeves reference may portray Entrepreneurs as devils, the truth is that you will need a representation fit for any possible situation. If we can learn something from the success of current renowned entrepreneurs, it is that troubles will always follow the profit. Having a wingman on your side that will warn you about potential difficulties in time is essential. Plus, it leaves you all the free time that you need for your part of the job.

In simple words: if you are a group of friends with funds – LLC is the entity that you are looking for. But be advised that you should always address every legal question in all seriousness and in a formal manner.

On the other hand, if you are a diligent entrepreneur ready to conquer the world – make sure that you have a Keanu Reeves on your side. In fact, consider consulting him for an advice before you decide to follow ours.

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