Starting a New Company: Choosing the Legal Structure

In short, a Limited Liability Company or "LLC" is most likely what you want. Just about every attorney I've talked to about this says that LLCs are preferred in almost all cases. There are only two reasons I can think of that you wouldn't want to use this structure (and only one of them is a good reason).

The first (and not so good reason) is that it does cost a bit to set one up, as compared to the negligible cost of setting up a sole proprietorship, which is usually just limited to the DBA filing fee. But, if there's more than one founder (i.e., sole proprietorship is out), or you plan to do business in multiple counties, or you plan to get any sort of outside funding at all (even if it's from "friends and family"--the most likely source for seed capital), you're much better off with an LLC, even considering the cost to form one.

But why not just do a DBA if there's only one owner? One word: Liability. A sole proprietorship, DBA or not, is "you". If things go wrong (which you always need to plan for), creditors will be coming after you personally, as will anyone that files a lawsuit against your DBA. The trivial cost of forming an LLC and the ease of operating one will be worth its weight in gold if you get into such a situation. Oh, and another reason: having an LLC makes it easier to take on partners and/or investors.

The second (and good) reason for not choosing an LLC is if you need a Sub-C Corporation for some reason. Why would you need one? Basically, if you are starting off with venture capital funding (most VC firms prefer or insist on Sub-C-Corp), are planning to go public very soon (if your IPO "event horizon" is more than a few years out, it's better to start off with an LLC and convert it to a C-Corp later), or plan to have a lot of investors early on. Otherwise, the additional paperwork and overhead of a C-Corp just doesn't make sense.

But what about a Sub-C Corporation? With the advent of the LLC, I'm not aware of any real advantage of an S-Corp over an LLC. Both provide the same level of liability protection and neither are taxed as entities (i.e., the profits flow through to the owners/shareholders). As these are the typical reasons for forming a S-Corp, the LLC is preferred. It's cheaper to form and easier (thus cheaper) to operate.

How to form an LLC? There are several web-based services (like LegalZoom.com, CorpAmerica, MyCorporation, and others) that make the process quick and easy at minimal cost. Having said that, if you aren't well-versed at such things, I really recommend having an attorney do the work (not including state filing fees--which you have to pay the on-line providers as well, it should cost around $500). Besides, if you don't have an attorney for your new business, forming your LLC is a great way to start a relationship with a new attorney--a necessary and valuable resource as you as a new business owner. The best way to find an attorney is ask people you know and trust. Short of that, there are a number of referral services on the Internet (like The Attorney Store, Legal Match, The Attorney Referral Network, and others). Above all, don't choose an attorney lightly--they are working for you, so you should interview them in much the same way as you would interview a new employee.