Recently, I read an Inc. article, “Are You an Entrepreneur? You’re (Darn) Right You Are And so is everyone else who tries to chart their own course. So let’s stop arguing about it, and start encouraging.” The author observed entrepreneurs debating about what it means it means to be a “true” entrepreneur. Arguments were that someone was a true entrepreneur if their business was B-to-C, retail, in a brick and mortar, scalable, or other. While reading the article, I considered whether entrepreneurs might also consider including business structure into the debate on which to build their visions.

So, this may be a good opportunity to share a few considerations for a few different structures that we see frequently in our lab (aka firm).

Why Structure Matters

Whether established, establishing, or still on the edge, choosing the optimal structure can be critical to the longevity and health of the business. Constantly revisiting a few questions can ensure the vision remains on a steady foundation.

Comparing Three Common Business Entities

I’m choosing three entities to discuss and providing a few questions for each. Let’s talk about the LLC, corporation, and tax-exempt nonprofit (quick note: these are by far not the only entities available, and we’re not discussing how to structure businesses (e.g., parent-subsidiary, series, etc.)). 

LLC (limited liability company)

Snapshot: A hybrid business entity comprised of partnership and corporation law. Law is usually the default if the LLC doesn’t maintain an operating agreement. Generally, fairly simple to standup and manage. Can be a bit of a trap if not structured and managed comprehensively considering applicable law, taxes, and people.

A Few Questions to Consider:

• Wanting to creatively or flexibly control your entity with limited regulatory control? (likely for you)
• Wanting to more easily maintain control of the company? (likely for you) 
• Wanting to receive different types of investments or loans? (likely for you)
• Wanting to transition between tax elections? (likely for you)
• Wanting to attract venture capitalists (“VCs”) and other series raising? (maybe not for you, but some traditional or sophisticated investors are becoming more comfortable with LLCs)
• Wanting to be owned publicly? (maybe not for you)
• Wanting to be your own employee? (maybe not for you)

Corporation

Snapshot: A longstanding business entity heavily controlled by state and, in some instances, federal law. A great place to start if considering receiving investments. Can be a bit more complex than the LLC as it relates to incorporation and governance.

A Few Questions to Consider:

• Wanting to look attractive to traditional investors? (likely for you)
• Wanting to engage in tax strategies? (likely for you)
• Wanting to diversify incentives for attracting talent as a startup? (likely for you)
• Wanting to go public? (likely for you)
• Wanting to freely control and operate the company? (maybe not for you)
• Wanting to swiftly transition between “founders” or investors? (maybe not for you)
• Wanting ease of regulatory compliance? (maybe not for you)

Tax-Exempt Nonprofit

Snapshot: A business entity with a focus on altruistic purpose. Fairly simple to establish the nonprofit on the state level, likely garnering community attention. Can be misunderstood when it comes to obtaining and maintaining federal tax-exemption, which is needed for philanthropic support.

A Few Questions to Consider:

• Wanting to focus on impact over profit? (likely for you)
• Wanting to generate revenue through “giving” and granting? (likely for you)
• Wanting to lift a specific community or cause? (likely for you)
• Wanting to leave a transgenerational legacy? (likely for you)
• Wanting to succeed to family? (maybe not for you)
• Wanting to maintain personal control over assets? (maybe not for you) 
• Wanting ease of regulatory oversight? (maybe not for you)

What Do I Think?

In my opinion, there is no right or wrong way. There is only the way the works for your track. Often times there’s the long game, but other times there are acute needs. 

Each entrepreneur and business leader should consistently consider their target(s) and strategy(ies). And while considering and evaluating, include the business structure and whether it is perpetuating or hindering the target(s) and strategy(ies). Ensure it is optimal for the need(s). And consider whether mixing it up is necessary. 

Maybe the next debate you’re in about being an entrepreneur or business leader will be in a swanky setting because your business structure has held true for a good long while.