A lot of people talk about the idea of starting their own business, whether that is a mobile app or a manufacturing company. I say go for it. I love the enthusiasm and vigor entrepreneurs bring to the conversation. However, many people enter into new ventures without any formal business structure. Lawyer 101 says to get everything in writing and have all interested parties sign it, especially when it comes to a new business. I’m sure the Winklevoss twins and that other guy whose name is hardly worth remembering still cry at night thinking about what they could have done differently.
So you have a new idea, you have a team together, and you’re going to make a killer app that gets you rich or you’ll die tryin’. Stop! Before you go any further, you want to get organized: who is doing what, how much everyone contributed, and how much they get. The easiest way to do this is to organize a business entity, which can come in the form of a Limited Liability Company (LLC), Corporation (either C or S-Corp), Partnership (limited or general), or, if you’re going at it alone, a simple sole proprietorship may work just fine. For my money, I vote LLC and here’s why:
An LLC is a relatively new form of business organization, providing the liability shield inherent to corporations, but without the pitfalls of double taxation. You don’t need fancy bylaws or articles of incorporation, you don’t have to pay state fees to issue shares, and you don’t have to follow the same corporate formalities in an LLC that you do in an Corporation. It’s cheaper, just as effective, and far more flexible. In fact, LLC’s are best described as the epitome of freedom of contract. That is, you can organize an LLC and describe the relationships between members in just about any way you can imagine.
A typical argument against LLCs is that venture capitalists only like to fund corporations. Why? They have all the legal paperwork set up to invest in them, their lawyers are lazy and are already familiar with corporate structures, and traditional wisdom says all successful companies are corporations. However persuasive this advice may seem, it is out of date.
I’ve had to opportunity to meet some venture capitalists, and they say they would be more than happy to invest in an LLC if the opportunity looked right. In other words, your company structure won’t make or break the deal. Furthermore, they thought an LLC may even be better, because if the business turned out to be a dud they could at least write off the losses on their personal taxes. However, we aren’t planning to fail, so we need another justification for starting with an LLC: they can be converted into a corporation pretty easily.
Some web experts out there will lead you to believe that the LLC-to-Corporation conversion process is complicated and treacherous to maneuver; however, the truth is if you have venture capital money knocking at your door, that money also has a lawyer, an accountant, and experienced business professionals who will handle the process for you. Nothing to worry about, just make sure you and your counsel read the documents carefully before signing anything.
Whether you chose an LLC or some other form of business organization, make sure you have something in writing and signed by you and your partners. An ounce of prevention is worth a pound of cure, and nothing can foul a good team effort faster than a greedy founder stealing it for himself.
Disclaimer: The opinions expressed in this article are just that – opinions. They are not to be taken as legal advice.