There are a myriad of decisions that need to be made when starting a new business but the importance of selecting the right type of entity structure should not be underestimated. At first glance it may seem simple and straightforward, but beware! The wrong entity type can prove costly both initially and in the future.
The following factors should be considered when selecting the entity structure:
- Who are the parties/owners starting the business?
- One or multiple parties
- Individuals or businesses
- Family relations or not
- U.S. citizens or not
- What are the intended roles of each of the stakeholders?
- What is the nature of the business being started? (There are different considerations for different types of businesses.)
- In what location will the business operate and provide sales and/or services? Will business be conducted in multiple locations/states?
- How is the business being financed/funded? Are there requirements from interested parties or stakeholders (e.g., lenders, VCs)?
- What profit/loss or capital contributions are anticipated from stakeholders?
- What are your projections for Gross Revenues, Compensation and Net Income now and in future years?
- What is the expected make-up of employees and the anticipated benefits that will be provided?
- What are the goals of the stakeholders and planned exit strategy and does the structure align?
- What are the imminent and long-term risks and liability exposures that should be considered?
It is only after these factors have been addressed that an informed decision can be made. The goal should be to choose an entity structure that will be most advantageous to the business and its owners, provide flexibility, and minimize taxes.
- What are the tax implications of your newly formed business structure and is this optimal?
- New / separate entity
- One or more entities (locations/product lines/income streams/risk minimization)
- Subsidiary of an Existing Entity
- Utilizing a Holding Company or Parent Company
In short, selecting the right entity structure for your business can be complicated. To avoid costly mistakes and have confidence that your business will get started on the right foot, we suggest consulting professional advisors when starting a new business.
Consider inviting SJG to help you with your decision-making process.
We know firsthand the pros and cons of different types of entities, which are often times not obvious, as there are many factors to be considered. One size does not fit all. For more than 25 years we have assisted businesses who have generated more than $1 billion in revenues and have personally consulted with over 200 emerging and start-up with planning and entity selection considerations.