Which Business Entity is Right for Me?
I’ve helped many dozens of business owners get their start. A common question is, which business entity is right for me? The answer: the one that lets you start making money as quickly as possible.
The most common reason small businesses fail is lack of capital. In other words, they run out of money. The more time and energy an entrepreneur spends trying to create a complex business entity, the less time she has to talk to customers and sell her product or service.
Is a C Corporation the Right Business Entity?
Some entrepreneurs, particularly entrepreneurs in the technology industry, have heard that they need to set up a C Corporation in order to attract investors. Sometimes they even want a C Corporation set up in Delaware or Nevada, even though they’re doing business in another state.
While it’s true that many investors require or desire a C Corporation in order to invest, there are at least two reasons why it doesn’t make sense for most early stage businesses to worry about this.
First, no matter how cool your business idea, you’re almost certainly not going to get funding from professional investors. Less than one percent (1%) of startups receive angel funding, and only .05% receive venture capital funding (link: https://www.entrepreneur.com/article/230011).
Second, setting up and operating C Corporations, particularly in another state, is the most complicated and costly choice you can make when choosing a business entity. Attorney and CPA fees are higher for these relatively complicated entities, and the meeting and reporting requirements are significant.
LLC or S-Corporation: A Better Choice for New Businesses
For almost all new businesses, a simple LLC or S-Corporation will do the job quite nicely. Both of these entities provide the owners some degree of liability protection, provide a format for governing decisionmaking and owner exit, and they’re far less expensive to create and operate.
What’s more, if your business does end up being the next Uber, you can relatively easily convert your LLC into a C Corporation to take advantage of real, and not just pie in the sky, investment opportunities.
Spending a little money to form your business entity the right way is a really good idea. But when you go in to meet your attorney, focus on the simpler and cheaper, rather than the more complex and expensive.
So, don’t over-complicate the entity selection process, and instead spend that time, energy and money on making money for your business.