Are LLC Businesses Really The Best Structures For Young Startups?
If you are interested in launching your own startup, you will likely be wondering what type of business entity you should register your company as.
There are many options (sole proprietorships, Limited Liability Companies (LLCs), Corporations, etc), all with separate pros and cons. This means that (ultimately) the best business structure for you in 2021 will be highly dependent on your personal preferences, business size, and industry.
Nevertheless, below we will consider a few factors that are likely to be quite desirable for startup owners. These include: a) being easy to set up, b) requiring a relatively low amount of capital to set up, c) providing limited legal liability, and d) being relatively ‘’flexible’’ so as to allow for the variety of different growth opportunities that may emerge in the future.
Examining Sole Proprietorships
According to the U.S Census Bureau, sole proprietorships are the most common business structure at the moment. This is likely because of the entity’s extremely simple setting up process, as well as the almost non-existent government scrutiny that they are subject to-particularly in comparison to incorporated structures (such as LLCs and Corporates).
A Sole Proprietor additionally retains ultimate control over the way that his or her business is managed- a fact which (generally speaking) is highly desirable for most starting entrepreneurs.
At the same time, sole proprietors assume all of the risks associated with starting a business as well. As there is no limited legal liability involved (no corporate veil), business owners of a sole proprietorship will not be able to protect their personal assets (such as their house) if their business becomes insolvent in the future.
Additionally, as they are not a separate financial entity from their businesses under the U.S judicial system, they cannot enjoy most of the tax benefits and deductions that LLCs and Corporations are privy to- as we will see below.
Incorporated Business Structures
All in all, incorporating your business will undoubtedly provide your startup with the most significant amount of flexibility and brand credibility- particularly in relation to future financiers and lenders.
This is because an incorporated business structure (such as an LLC or a Corporation) is categorised as a completely separate financial entity legally, and consequently provides limited liability to its respective owner(s) (or shareholder(s)).
This is definitely one of the greatest advantages of incorporating your business, but it is by no means the only one.
For one, you will likely be able to obtain a higher amount of financing options than if you were a sole proprietorship. This is because your business’s indefinite status will inadvertently reflect a certain element of reliability and credibility to most traditional lenders- such as banks.
Of course, there are certain disadvantages involved with incorporating your business as well. As an owner of an LLC business (or a shareholder in a Corporation), you will be subject to a much higher degree of legal scrutiny from government agencies (such as the IRS), and will need to continuously satisfy certain procedural prerequisites.
Moreover, the setting up process of an LLC and Corporation is significantly more complicated than a Sole proprietorship, at least when following the ‘’conventional approach’’.
In the last couple of years, the propelling emergence of specialised and affordable incorporation services has meant that business owners no longer have to: a) rely on expensive attorneys, or b) use up a significant amount of their time so as to correctly satisfy every legal requirement involved with launching an incorporated business.
Persons interested in learning more about LLC formation services can have a look here.
Finally, you may consider forming a general partnership. This is (practically speaking) almost identical to a sole proprietorship, with the biggest difference being the division of managerial control and ownership (and consequent liability).
Whereas procedural rigmarole is undoubtedly quite small, initiating a startup as a general partnership should only really be done if you are extremely confident in your partners: fiscal sustainability, co-management style, and corporate ethos- especially when considering that you will be jointly liable for any debts incurred by the partnership.
A Final Take
As briefly mentioned above, the best business structure for you will undoubtedly be highly dependent on your specificities. Nevertheless, we have analysed a plethora of considerations that you will likely benefit from taking into account before making a final decision.