One of your critical early decisions about your new business is what form it will take for accounting, legal and tax purposes. Much has been written on the subject, and a lot of it is out there and accessible on the Web. But there are a few things you should decide first before choosing a business structure.
You´ll need to consider several factors before you speak to an attorney about a form of ownership. This post will not focus on the types of organization themselves (links to some resources on that are at the end). Rather it poses a few questions you should answer that will guideyour decision:
How many owners will there be in the business? If you´ll be in business by yourself, sole proprietorship is an option, and it is certainly the easiest and most straightforward structure. (Not sure how many owners? Read "Should You Go Solo or Partner?".) What if there will be two of you? Or five? Some form of partnership or corporation will be necessary. Because of liability considerations, there is little to recommend a partnership (see the next question) so you´ll probably be looking at a corporate structure. LLCs work well if there are only a few owners, but think about an S-Corp or C-Corp if ownership will be more broadly distributed.
To what degree could your business expose you to liability? Being the only owner doesn´t mean sole proprietorship is right for you. If you´re in a business where the potential for liability is high, you would be wise to protect yourself as an S-Corp or LLC. Consider the worst case scenario: What could go wrong in a transaction that a customer could sue you for? And what could your financial exposure be? If it´s no more than the price of a consulting contract, sole proprietorship may be sufficient. If your liability could have a major affect on your financial condition, consider protecting your assets through a corporate business structure.
Will you be using outside investors to fund your business? If after answering the first two questions, a corporation looks right for you, consider how you´re going to finance your business. If you´ll likely be working with angel or VC investors, your attorney will almost certainly point you toward a C-Corp because these types of financing arrangements mean you´ll have multiple classes of stock, which C-Corps can handle. If you´ll be bootstrapping, an S-Corp may be a good choice.
Once you have considered these questions, your next step is to consult with a small business attorney. Ask for referrals from other small business owners, from your banker or your accountant, and find out why they´re recommended. Think about including the attorney you select on your advisory board.
Some resources on organizational structures:
Business Structures (from The Biz Lawyer)
Forms of Business Ownership (from the SBA site)
Comparison Chart for Different Business Entities (from AllBusiness.com)
What´s the Best Corporate Structure for an Early Stage Company? (A blog post from Brad Feld)
What Are the Benefits of LLCs and LLPs? (from AllBusiness.com)