Business Structure

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Taking the plunge into entrepreneurship is an exciting process that contains several “firsts” throughout, like a first employee, first sale, or that first business card created. Entrepreneurs find themselves surrounded by a number of considerations that they may never have faced prior, and it can be hard to figure out where to begin, or what takes priority in a day-by-day scenario. That is a perfectly natural feeling to have. It can be a bumpy road to starting your own business after all, and the first focus of many is solidifying a business idea and trying to break your way into the market.

Naturally, the idea and product behind a new business takes the most priority since an empty castle protects nothing. However, the purpose of this Skill is to emphasize what should, ideally, be the second consideration and step that a budding entrepreneur takes on their business journey. And that consideration is choosing the appropriate business structure. It is important to note that business structure and business methods are entirely separate concepts, even if they do sound similar. But where business methods are concerned with sales, marketing, or product, the concern of the business structure is the legal framework that encompasses the entire business.

Business structure is so much more than just selecting a business entity (Figure 1). It goes without saying that needing to understand what entity types exist, and which is most appropriate for you, is a prime factor when just starting out. After all, each structure type comes with different types of overhead costs and concerns, and each can offer different protections for you as an owner. But even beyond that, business structure extends to not just the entity, but the relationships with business partners, how you can seek investment opportunities, and the ease of attracting various contractors and employees.

A figure shows the different business entity types in the form of a mind map. A bubble at the center reads “Business Entity Types.” This bubble leads to seven other bubbles located around it. These bubbles read as follows: “Partnership,” “LLC,” “C-Corp,” “Co-op,” “B-Corp,” “S-Corp,” and “Sole Proprietorship.”

Figure 1. Business Entity Options
A figure shows the different business entity types in the form of a mind map.

Source: Author.

Within the different types of entities that exist, there are a myriad number of ways those entities can be run. Just selecting the entity type itself is not sufficient, as there is no “one size fits all” solution. These considerations include how to add partners, what happens when a partner wants to leave the business, how are decisions made, and more. The matter of scaling your business comes into play as well. There are scenarios that can occur that will reveal that your current business structure is no longer as beneficial as it used to be, and an alternative structure is more desirable. This can be done for purposes of investment, alternative management, or a tax restructuring as well.

Beyond that, there is also the matter of protecting not only yourself, but your business idea. This is also achieved as part of your underlying business structure. The business structure holds the intellectual property ownership that gives value to your products, business methods, and clientele lists. This becomes the cornerstone of the value behind properly setting up a business structure, to hold this intellectual property, which increases the appeal of the business to outside investors and parties potentially interested in a business acquisition.

In sum, the business structure itself truly becomes the foundation of your entire business after you begin getting established. Every facet of your business operation, present and future, can be impacted by the structure you establish and the agreements around it. Without a proper foundation, any business, no matter how sophisticated or well thought out, can come crumbling down.

Further Reading

Bagley, C. E., & Dauchy, C. E.. The entrepreneur’s guide to law and strategy (
5th ed.
). Cengage.
Portolese, L., Krause, J. A., & Bonner, J. R.. Entrepreneurship. Flatworld.
Drake, D. J. Business planning: Closely held enterprises (
5th ed.
). West Academic.
Tiffany, P., Peterson, S. D., & Barlow, C.. Business plans for Dummies (
3rd Revised ed.
). John Wiley & Sons.
Lau, D. C., & Murnighan, J. K. (1998). Demographic diversity and faultlines: The compositional dynamics of organizational groups. Academy of Management Review, 23(2).