If you are starting a business, forming a limited liability company (LLC) or corporation may seem like the biggest step. Today, many entrepreneurs can complete much of the process online. In many states, filing paperwork takes little time. Because of that, you may believe the hardest work ends when the state approves the filing.
However, forming a business and structuring a business are not the same thing. Filing creates the company. Structure determines who owns the business, who makes decisions and what happens when circumstances change. Those choices can affect your company for years.
Formation vs structure
When you form a business, you create a legal entity. When you structure a business, you create rules for how it will operate. Some of the key decisions include:
- Choosing the business entity
- Defining ownership interests
- Assigning management roles
- Establishing profit-sharing rules
- Planning for ownership changes
These issues usually appear in operating agreements, shareholder agreements and similar documents. While formation paperwork creates the business, these documents establish how owners will run the company and handle major events in the future.
How structure can address future changes
Problems can develop when owners do not clearly define their rights and responsibilities. Business partners may disagree about who can make decisions or how profits should be distributed. Disputes may also arise when one owner wants to leave while another wants to continue operating the business.
Other events can affect a company as well. Common examples include:
- Adding a new owner
- Accepting outside investment
- Planning for retirement
- Transferring ownership
- Addressing incapacity or death
These situations can raise questions about control of the business and its future. If the company’s governing documents do not address them, owners may face uncertainty about how the business will continue operating.
Building a long-term framework
The choices you make when forming a company can affect the business for years. While the filing process may be relatively simple, the structure behind the company may influence how owners handle future opportunities and challenges.
Business formation involves more than creating a legal entity. It also involves creating the rules that will guide the company over time.