Why Doing it Yourself Matters
UNDERSTANDING HOW A COMPANY IS BUILT
The world of business is filled with many terms such as S-Corporation, LLC, stock, equity, and capitalization along with many other key terms that new business owners should understand. Hundreds of top ranked websites will tell you about the legalities of your new company and the information can be overwhelming. But honestly, in our decades of industry experience, we think that the “first things first” approach is best for new business owners. Whether you’re creating a new food product, starting a pet care line, developing a mobile app, or plan to patent your new high-tech device, the truth is, no matter what type of legal entity you form, you may need to change it's legal structure down the road. Your company's growth, adding an investor, or a change in your strategy may have an impact in your reasons for moving say, from a limited liability company to a corporation. That said, we encourage you to ask your lawyer about what type of company might be best for you and your circumstances. Keep in mind, your needs may change and, as a result, the type of company structure that you need may change. But we think change can be very good. Understanding that you're not "locked-into" one type of company for your business can be liberating. We see so many new business owners overly stressed about selecting the right company type. In addition to good legal counsel, a Certified Public Accountant or your tax preparer, can offer you tremendous insight on how best to structure your legal entity so that you pay lower taxes - helping you put that money back into your business.
Let’s look at an example. Alex and Mary want to start a food truck business. It’s just the two of them, They’ll each have an equal stake in the business and both will equally invest their own money while building the company. Because they plan to be local, they want to buy a single truck and decide that a limited liability company (LLC) suits them best because doing so means they don't need formal meetings and annual reporting (less paperwork and lower legal fees). They've decided to be taxed as a partnership. Their company name is available with the state, and they call it A&Mazing Feasts, LLC. Eighteen months later, their business is off to a great start and sales are slightly better than expected. They’ve found that customers love their unique menu offerings and few customers have signed long term contracts to have them on-site on a regular basis. They’d like to expand by hiring a few employees and buy additional food trucks to meet the demand. Rather than take out a loan, they’ve found an investor interested in funding their expansion. He’ll offer them $500,000 in exchange for a 20% equity stake in the company. Alex and Mary are elated! The investor’s lawyer tells them that they need to convert the LLC to a corporation and issue shares of stock in proportion to their respective equity positions, formalize their agreement with respect to the investor’s funds, determine voting rights for company decisions, elect the officers and directors of the corporation, and address the investor’s preferred exit strategy (because at some point, he wants his money back with a profit). While some may think it’s best for Alex and Mary to start a corporation from the beginning, they may not have foreseen whether the business would take off or, if they wanted an investor to help fund expansion. If Alex and Mary obtained a loan from a bank, the need to convert the LLC to a corporation might be delayed or not needed.
As you can see from the hypothetical above, it is better to become familiar with the types of business structures available to you and determine your long term goals in the beginning. But as you probably know, that is not always practical. In most cases you will simply use your best judgment (along with the advice of your legal and tax team) to make this decision. Be assured that it's not the end of the world if you need to change your legal structure at a later date. Naturally, you’ll want to remain flexible, realistic, and always educate yourself before making a decision to form or change your startup. Fortune favors the bold, so let's begin!