The idea has cultivated, the product or service has been developed, you’ve pitched it around town, and now you and your cofounder are ready to start building a business. Before you head down the road of taking on capital, there are some steps you need to consider along the way.
Nicole Berry, Vice President and Assistant General Counsel at JPMorgan Chase, suggests for early-stage founders to figure out the structure of their business before they gain momentum, take on investments, and become too busy to focus on the legal framework needed to protect their company.
“If you take the time to get your business in order and make corporate form decisions early, it may later save your team hours of time, stress and legal headaches,” Berry said.
Here are three decisions early-stage founders need to consider when launching their business:
For Profit or Nonprofit
Aligning your business model with the company’s income stream could help determine if it needs to be for profit or nonprofit.
“If the company’s initial capital will come mainly from investors, a for profit business model is most appropriate because investors expect a profit. If the company will be funded primarily by donors and the company’s mission is a tax-exempt purpose, such as a charitable, environmental or educational good, a nonprofit may be the right structure,” Berry said.
Once you determine whether a for-profit or nonprofit structure is most appropriate, consider that nonprofits must be organized as trusts, corporations or associations, to qualify for 501(c)3 tax exemption. On the other hand, for profit businesses have access to a wider array of corporate organizational structures.
Limited Liability Company or S-Corp
If you are choosing to go the for-profit route, two options many small business owners consider are a Limited Liability Company (LLC) or an S Corporation (S-Corp). According to Berry, the two entities have many similarities which include:
“Both can protect the owners from liabilities incurred by the company, absent negligence or intentional wrongdoing. They also allow proceeds from the business to be taxed as personal income and avoid double-taxation,” Berry said.
However, there are also some differences to consider. LLCs allow flexible member management, with recommended corporate formalities, while S-Corps require extensive corporate formalities, such as separate corporate fund accounts, annual meetings of the board of directors and keeping corporate minutes.
“It’s important no matter which form you choose that the business is not a shell company that’s merely acting on behalf of the owners or you could lose your limited liability protection,” Berry added.
Grants or Seed
Every startup is looking for cash to continue building their dream. However, before you head over to your friends and family, there are options to apply for free money and save you from some uncomfortable questions at Thanksgiving dinner.
Entrepreneurship programs are blossoming around the country and more local governments are finding ways to help launch more startups and create jobs through grant programs. Other organizations such as the Small Business Administration, provides information about which businesses might be eligible for startup grants as well as the nonprofit Foundation Center, gives guidance on fundraising and grant proposal writing.
At the end of the day, it's always important to weigh all your options to learn what's best for your company.
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