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5 Factors to Consider When Choosing a Business Structure for Your Startup

By Karishma Borkakoty

Published on 16 Sep 2024 6 min read

When you’re launching a startup, one of the first — and arguably most crucial decisions you’ll make is choosing the right business structure. This choice can affect almost every aspect of your business, from daily operations to taxes and even your personal liability. 

You’ve got to decide how the business will run, who’s in charge, how taxes will work, and how much protection you’ll need. 

That’s quite a list, but don’t worry. With the right help, it’s not as complicated as it seems. 

doola is here to walk you through it step by step, cutting out the confusion and helping you choose a structure that matches your vision. Whether you’re leaning towards an LLC or a corporation, you’ll know exactly where you’re headed.

Now, let’s get into the five key factors you need to think about when deciding on a business structure for your startup, so you can get things right from the get-go.

1. Liability: How Much Protection Do You Need?

Let’s start with the big one — liability. 

Liability protection determines whether or not your personal assets are at risk if your business faces a lawsuit or debt. You’ve worked hard for your savings, home, and other personal assets, so it’s very IMPORTANT to know how protected they’ll be if something goes wrong in the business.

For instance, certain business structures like sole proprietorships and general partnerships don’t offer much protection. If your business gets into legal or financial trouble, creditors can come after your personal assets. 

On the other hand, structures like LLCs (Limited Liability Companies) or corporations create a barrier between your personal assets and the business’s liabilities.

So, here’s what you need to do:

Even if you’re starting small, consider what’s at stake in your industry. If there’s any risk that could personally impact you, opt for a structure that provides solid liability protection. LLC and corporations are typically better if you want to keep your personal life separate from your business risks. 

This is particularly important if you’re in a high-risk industry, like construction or manufacturing, where accidents and lawsuits are more common. 

Learn more: What Type of Business Entity Should You Form?

2. Tax Implications: How Will You Be Taxed?

Your choice of business structure directly affects how your business will be taxed. Each structure comes with its own tax requirements, and it’s important to know which one will offer the best advantages while keeping your business compliant. 

LLCs offer flexibility in how you’re taxed. For example, a single-member LLC is taxed like a sole proprietorship, with profits passing directly to the owner’s personal tax return. However, LLCs can also opt to be taxed as an S-Corp, which can reduce self-employment taxes in certain situations.

Let’s take Etsy sellers as an example. Many sellers start as sole proprietors, reporting their earnings on their personal tax returns. As their businesses grow, some transition into LLCs or S-Corps to gain tax advantages, particularly if they’re making significant profits. This change allows them to retain pass-through taxation benefits while possibly reducing tax obligations.

doola’s Pro Tip: Taxes are complex and inevitable, so it’s wise to consult a tax advisor when making your decision. They can help you determine which structure best fits your short-term needs and long-term goals.

3. Control: How Much Say Do You Want?

Another major factor is how much control you want over business decisions. Do you want to call all the shots, or are you open to sharing control with co-founders or investors?

When Facebook (now Meta) was founded, Mark Zuckerberg structured it as a corporation to raise capital from investors. Over time, Facebook issued different classes of stock, allowing Zuckerberg to retain more voting power than other shareholders, thus keeping control over the company’s direction, even as it grew.

Similarly, if you’re a solo entrepreneur, a sole proprietorship or single-member LLC allows you to have total control over the business.

But, if you’re working with co-founders or bringing in outside investors, you’ll need a structure that outlines who has decision-making power, such as an LLC with an Operating Agreement or a corporation with a board of directors.

doola’s Pro Tip: Set up agreements early on that clearly define who has control over different areas of the business. This can prevent conflicts as the business grows and evolves.

4. Scalability: Where Do You See Your Business Going?

You may have started small, but where do you want to go from here? Is this a side hustle that’ll stay local, or do you have big plans to scale globally? 

Your business structure should support your growth ambitions and accommodate future needs like hiring employees, opening new locations, or even going public.

Certain structures are more suited for businesses that plan to expand rapidly. For instance, corporations (especially C-Corps) are built for scalability, allowing you to raise capital through stock sales and attract investors more easily. 

On the other hand, sole proprietorships or partnerships are simpler but less flexible when it comes to growth, as they often struggle to bring in external investment.

In addition, if the owners don’t plan on taking on investors or expanding significantly, an LLC can offer enough flexibility without the complexities of a corporation.

Here’s an example for you:

Warby Parker started as an LLC when it was a small online eyewear retailer. As the company grew, the founders transitioned it into a corporation, which allowed them to raise significant amounts of capital from investors. By issuing shares, they could fund rapid expansion, open physical stores, and prepare for a public offering.

Straight from doola’s playbook: Even if you don’t plan to scale immediately, think ahead. You can start small and transition into a more complex structure as your business grows, but make sure your initial structure won’t make future transitions difficult.

5. Compliance and Paperwork: How Much Red Tape Can You Handle?

Every business structure comes with some level of administrative and legal work. However, some structures demand far more attention to detail when it comes to paperwork, tax filings, and compliance regulations.

If your tolerance for bureaucracy is low, you’ll want a structure that keeps compliance straightforward. LLCs, Sole proprietorships and partnerships tend to have minimal ongoing administrative requirements and legal formalities. 

Many freelancers and small business owners choose to operate as sole proprietors or single-member LLCs to avoid the heavy compliance burden. They don’t have to worry about formal meetings or detailed filings, which keeps the business running more smoothly with fewer administrative hassles.

However, some business structures like corporations (especially C-Corps) that involve more paperwork come with perks, like stronger liability protection and better tax strategies.

So, it’s a trade-off between simplicity and security. If you’re fine with more formalities in exchange for added benefits, a more complex structure might be worth the extra effort.

doola’s Pro Tip: If compliance seems daunting but necessary for your growth, consider hiring a legal or administrative professional to help manage the paperwork, freeing you up to focus on running the business.

Building a Strong Foundation for Your Startup With doola

Choosing the right business structure for your startup isn’t something you want to rush through. In fact this decision of yours is going to set the tone for everything you’re about to build. 

So make sure you get it right, and a lot of other things just fall into place.

Now, remember what we talked about earlier. You’ve got to think about how much personal protection you want (you don’t want your personal bank account on the hook if something goes wrong), how taxes are going to work and whether you’re okay with calling all the shots yourself or sharing that power with a co-founder or investors. These are the big factors you need to weigh.

It’s a lot, we know.

But that’s why doola is here. We help people like you — entrepreneurs with big dreams figure out exactly which business structure fits them best. We break down the entire formation process, answer your questions (even the ones you didn’t know you had), and make sure you feel clear-headed before you commit to anything.

And, we don’t stop there.

We’ve got an entire “business-in-a-box” toolkit with us to make your life easier. Check it out:

Registered Agent Services: Hate paperwork? Same. We’ll take care of your compliance, deadlines, and all those legal documents so you don’t have to. 

Business Formation: LLC? Corporation? Whatever you’re leaning toward, we’ve got you. We handle the paperwork, help you set up your business bank account, and make sure you get the ball rolling.

Bookkeeping and Taxes: We take care of your bookkeeping and taxes, keeping you compliant and stress-free so you can focus on what you’re good at.

Transparent Pricing: We don’t do hidden fees. What you see is what you get. No surprises. We care about your budget and expectations a lot.

Proven Track Record: People trust us for a reason. We’ve helped plenty of entrepreneurs reach their business goals, and we’re ready to help you crush yours.

Sounds good? Ready to take that next step? Book a free consultation with us today and let’s get this thing rolling.