I frequently get questions from start-up owners about the pros and cons of each organizational structure. Should you start your business as an LLC, an S-Corp, or something else? Each startup organizational structure has pros and cons, which means there’s no single best organizational structure for startups. Here’s what you need to know before you choose.
What Is the Best Organizational Structure for Startups?
The startup organizational structure you choose will depend on the nature of your business. Small companies might opt for a structure different from that of larger organizations. You should choose the best structure for your business now and in the future.
Fortunately, you can usually change your startup business structure later if your chosen one is incompatible with your goals. Here are a few of the most common types of organizational structures.
LLCs
A limited liability company, or LLC, is a legal entity that allows you to operate a business without being held responsible for any debts or liabilities that the business accrues. For this reason, it’s crucial that you at least opt for an LLC, not a sole proprietorship. If your company is sued, you don’t want your personal assets on the line.
Members own LLCs. They can be taxed only at the member level, avoiding the double taxation in a C-corporation.
If you start your business as an LLC, you can convert it to a corporation later. However, there will be some hoops to jump through, so consider whether you want to choose an LLC or a corporation.
An LLC is the simplest startup organizational structure with the fewest requirements, making it an attractive option for small businesses. However, venture capital investors will typically not invest in an LLC. To secure funding, you might opt for an S-corporation or C-corporation.
S-Corps
An S corporation, or S-corp, is similar to an LLC in that it absolves the owners of legal liability. One key difference is that it must have a board of directors to oversee the governance of the business. However, if only one owner exists, the board only needs one member.
S-corps can have up to 100 owners, known as shareholders. Shareholders are issued common stock as evidence of their ownership. An S-corp may be required to have multiple offices, usually the CEO, CFO, and Secretary. In smaller corporations, the same person can generally hold all three offices.
Although S-corps are taxed similarly to an LLC, you can avoid some self-employment taxes with an S-corp by paying yourself a salary. An S-corp is also subject to more restrictions and formalities than an LLC, such as record maintenance, regular shareholder meetings, etc.
C-Corps
A C corporation, or C-corp, is similar to an S-corp with a few key differences. First, there is no limit to the number of shareholders a C-corp can have. A C-corp can also issue multiple classes of stock, while an S-corp is limited to common stock.
C-corps are also taxed differently than S-corps and LLCs. While an S-corp’s profits are only taxed at the owner or shareholder level, a C-corp’s dividends are taxed in addition to its earnings. If you initially choose an LLC or S-corp for your startup organizational structure, you can convert it to a C-corp later.
You can consult a business CPA and attorney before filing any paperwork, regardless of your startup organizational structure. They will help you navigate your options and ensure you’re on the right track.
It’s essential to run your startup correctly from the very beginning. If you’re starting out in your business, you’ll benefit from my articles on leadership and management. Sign up here to have weekly business advice delivered to your email inbox.
Coach Dave
- Experts Recommend These Exit Interview Best Practices - June 27, 2024
- Another Viewpoint About Start-up Organizational Structure - June 20, 2024
- Effortless Techniques to Master Business Financial Forecasting - June 13, 2024
