Step 5 of Starting a Business: Determine the Legal Structure of Your Business


My first business had its doors open for about three years. Today, I’m the co-owner of another small business that is itself about three years old. Between the two, I’ve worked at several other companies, with all the various business structure abbreviations like LLC, Inc., and LTD after their names.

Some business owners can immediately rattle off all forms of business. They can tell you which one is best for a given situation, what the pros and cons are for each, how they’re all taxed, and anything else you’d need to know when starting a business.

I’m not one of those business owners, even after having gone through this process more than once. I knew all the right information at one point, of course: when I started my first business, I did all the reading and research to determine which legal structure was best for my company at the time. I understood what all the abbreviations meant—not just what the letters stood for, but what each one really meant, including how the different structures would affect my business in both the present and the future, what my needs and limitations were, my risks and liabilities, and what filing, licensing, and taxation requirements I needed to highlight on my company calendar.

What I Learned (and Re-Learned)

In the months that followed my starting the business (a Limited Liability Company, in this case), I was more than happy to spout off answers and advice to the would-be freelancers and budding entrepreneurs who would come to me with the exact question I’d had when I was in their place not that long ago: “Okay, so I want to start my business, but how should I structure it?”

That information has since been kicked out of my brain. Other, much less useful information garnered from running said business replaced it. That’s why I had to go through the process again when, after my first business closed, I joined another business in its starting stages. I had to do all the research again, though it went much quicker the second time around.

And I’ll do it yet again if it comes to that in the future—whether that means starting something brand new, or expanding my current empire. Partly that’s because the necessary information hasn’t yet wedged itself permanently in my long-term memory, but also because every business is unique, with different decisions to be made, different customers to serve, and many different milestones to achieve.

That’s why this is such an important decision for any new business owner. And it’s not one to be taken lightly. When starting my business, I knew my individual goals and circumstances played a big part in which legal structure I chose for my business. But it also worked the other way around: the legal structure I chose would effect on the way I ran my business from that point forward. This decision would dictate what papers I’d have to file in order to keep my business open year after year. It would affect how much money I’d pay in taxes. Perhaps most importantly (and most terrifyingly to me at the time), it also affected the personal liability I would potentially face as my company’s owner.

Where I Struggled

It wasn’t necessarily the decision itself that was difficult for me. It was all the implications of settling on a legal structure, period. I didn’t want to make the wrong decision. This was one of the first big steps I would make as a business owner, and I was afraid of messing it up. I struggled to balance what I knew about my business in it’s current, brand new stage, with what I hoped it might one day become. I worried that thinking too ambitiously in the beginning might make things more difficult for me down the road. At the same time, I thought about what might happen if thinking too small would place limits that I wouldn’t be able to break through later on.

Fortunately, I made the right decision on which legal structure was right for my business. It was one of the first decisions I would have to make as a business owner, and the decisions only got tougher (and much more involved) from there. Sometimes I think the hardest part of it all was having to make all those decisions on my own. And, I would later learn, going into business with someone else leads to even more decision to make when you’re setting your business up. Partnering up makes a lot of things easier, but it also brings along its own challenges.

Going It Alone

I was the sole owner of my first business: I set the tone, I set the pace, I made all the decisions. For a control freak like me, that seemed like the ideal scenario. But there are plenty of downsides to being the sole owner of your business, whether have employees or you work alone.

When I was alone at the top of the food chain, I had to make all the difficult decisions on my own. Sometimes I was lucky enough to have the advice and expertise of people I trusted to inform my decisions. But those moments where rare, especially when I was just starting out and I didn’t realize just how much help I needed—or how to ask for it. And even when I had the help, when it really came down to it, the burden was still on my shoulders alone. Being the person in charge meant having the last word on absolutely every aspect of my business, including (and especially) the bad news or the tough decisions. And that also meant having to take credit for the consequences—the good, the bad, and the ugly.

That’s an incredible amount of pressure, and it’s not something I handled well in the beginning. It’s the kind of thing that kept me up nights, kept me distracted while working, and kept me from fully disengaging when I wanted to relax. In some moments I found myself looking back on that time when the most important thing I could do for my business was to figure out how to structure it in the first place. Some days I secretly wished to go back to the time when the most important task on my to-do list was to file the paperwork to get my business going. I longed for that exciting time in the very early stages of starting a business, when uncertainty is coupled with excitement, and all the fear of failure is balanced with the dreams of success.

For a long time, I thought I was alone in these thoughts, and at times it got to me. I’m lucky to have learned before giving up that I was far from alone in going through these struggles as a business owner. I learned this by networking with other entrepreneurs—something I should have been doing from the very first moment I had the idea to start my own business. Even more so, the point was driven home later in my career, when I knew firsthand and without a doubt that I wasn’t alone in any situation I could find myself in as an owner—because I had a partner.

Partnering Up

Having a business partner I could trust meant unshouldering some of the burden and sharing the load. It meant a different perspective when I was stuck on something, and it meant I had help in making decisions for the business.

Having a business partner was a new experience and, as with anything, it came with new challenges in addition to the benefits. If you plan to have a business partner, that plays a role in the way your business is structured. It also means there are different decisions to make and new conversations—not all of them pleasant—to be had. The most important thing when you go into business with someone is that you’re both on the same page about how you’ll run the business together. And in order to be on the same page, it’s essential to have written documentation in place.

I know firsthand how tempting it is to trust in a handshake agreement when you go into business with someone. This is especially true when that someone is a friend or family member. When you start a partnership off with goodwill, it’s easy to simply trust each other to make the right decisions, split the workload, share the success, and honor agreements made over the course of conversations.

But I also know just how quickly those agreements can fall apart when things start to go south and there’s nothing on paper. Handshake agreements, even between friends and relatives, don’t belong in a business partnership. There’s no getting around it.

And really, that’s true no matter what form your business takes, and no matter how many or how few people with whom you share ownership. Having a full, clearly-stated record of your responsibilities, commitments, expectations, and liabilities as an owner can make all the difference in how you move forward with your business.

Setting the Tone for My Business’s Future

Determining the legal structure of my business seemed daunting at first, but it was the essential first step in getting my business off the ground. It wasn’t a quick, simple decision like I thought it would be, but in some ways I’m glad I didn’t breeze over it. It was only the beginning, and much more difficult decisions would start coming my way as soon my company was up and running. How I handled that first task helped set the tone for what was to come.

In addition, knowing that my company was structured correctly, and that I’d done my due diligence in learning the pros and cons of each option before moving forward, helped me to know without a doubt that the three-letter acronym following the name of my business was the right one for me. And when your company itself feels right, it makes it that much easier to feel motivated and confident about building your business from that point forward.


About Author

Robin Karleskint

Robin Karleskint has worked at several new businesses, both as an owner and an employee. Currently she is a project manager at Cosmital Designs, a company she co-owns in Orlando, Florida.