Legal Structure for Startups

Legal Structure for Startups

Founders like to dive right in, that’s the way most of us are. Guided by our unhinged ambitions, running towards what we want to accomplish and pushing to succeed. But, as we’ve talked about before, in a startup, structure and research are essential. Don’t get carried away with fanciful flights of ambition, slow down and do your homework. What model are you going to use for your new venture? What corporate structure will you use? Why would you choose one over the other? What are the benefits of each and which one applies best? If you don’t have answers to these questions, then you need to slow down and figure it out. It all seems so daunting, right? That’s why we dedicate a chapter to the legal structure for startups in The Startup Playbook and urge you to seek legal assistance too.

There are many legal ramifications to how you do business and how you structure your startup. Don’t get into a mess with commercial and tax laws, avoid the situation altogether with a plan. The less you know about how you plan on doing business the more likely you’ll have unnecessary troubles down the road. You want to think ahead rather than indulging the desires of the moment. Really, we’ve done it the other way. It’s much easier to do this stuff up front and see new startups get it wrong all the time.

Your legal and business structure choices

Many early startups fit the idealistic model of a few people working in a garage, cranking away, building their product. One of the last things on their minds is what type of business structure they should operate under. This is a mistake. Even very early on, many of the structures that exist provide levels of protection, tax benefits, and a method for sharing ownership among the founders and investors that don’t exist outside a legal umbrella. Some of the dizzying array of options include: Sole Proprietorships, General Partnerships, LPs (Limited Partnerships), C Corporations, S-Corporations, and LLCs (Limited Liability Companies). There are even permutations of several of these that make the list quite a bit longer.

Each class of business offers advantages and disadvantages, as the founder of your startup you need to know what those are. You need to be able to speak intelligently on these subjects to your founding team, potential investors, and be able to back up the decisions you make. Showing that you understand your structure speaks volumes about your leadership qualities and demonstrates your competence. Both are essential features of a successful founder.

Get the help you need early on. It’s really quite a bit easier than you fear. Read the chapter in The Startup Playbook and find a local, startup-friendly lawyer by asking mentors, advisors and other entrepreneurs in your area.

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