How can a new business owner determine what type of entity is best for the company?
There is no single entity, no one-size-fits-all that works for every new business. There are so many things to consider, such as how much money do you need to start, where is that money going to come from, do you need to bring in outside investors or lenders and, if so, what type of entity those might demand. Are you going to have co-owners, because if you are, you can’t be a sole proprietor. And people who are putting money into the business but not working in it may have different expectations than someone who is going to be a working partner. Those types of things will shape the type of entity you choose, but you also have to consider things such as exit strategy.
It’s difficult to think about an exit strategy when you’re just getting started, but if your ultimate exit plan is to be bought out by a large public company, you may lean more toward being a corporation so that you can facilitate a tax-free acquisition, which other entities cannot do.
It’s something you should rethink fairly often, as often as you think about your finances or your marketing plans, because your needs may change over time.
What advice would you give someone who’s on the fence about opening a business?
I would say, ‘Think about how passionate you are about it because it’s going to be very difficult in ways you don’t expect.’
People wake up with a great idea or are very engaged in client service or product development, and they forget about the day-to-day things, like struggling to make payroll, and the risks they have to take, like not being able to sign a lease without personally guaranteeing the rent. The compliance, HR issues and accounting issues are often lost in the excitement of developing the product and serving the customer. If you don’t have a passion from the get-go, you can get bogged down and sidetracked and deflated with the day-to-day activities of really running a business.
Talk to other people who own their own businesses and find out what their worst nightmares have been running the business. Then ask yourself if you could live through that and still be happy with having your own business. If you go in with your eyes wide open, you’ll have a much better chance to succeed.
Rich Gunn is a partner in the tax group at Burr Pilger Mayer. Reach him at (415) 288-6218 or [email protected].
