An iPhone with a dead battery is worthless. I have three of them sitting in a drawer at home. I don’t even bother taking them out and trying to sell them because they are of little value.
A startup organization (e.g. LLC, S-Corp) in the earliest stages of a venture is worthless too. By itself, it doesn’t add any value. Without a new venture opportunity and a working model that generates revenue, there is no point in setting it up.
I have plenty of “startups” organized and sitting in a drawer of paper (I use the phones to hold them down). I filed paperwork and tax forms but never made a dime because there ended up not being a good opportunity or model for the business.
So, I shut it down before it did anything, and I ended up doing a bunch of administrative tasks I didn’t want to do.
The problem is that many entrepreneurs spend too much time trying to get their organization in place at the very beginning of their new venture. Even before they have anything worth organizing around. During this process, they sacrifice what is most important now for some potential benefits in the future — benefits only realized if the new venture opportunity and model actually work.
A startup consists of two fundamental components: an entrepreneurial opportunity and an organizational structure. Each of these components play a critical role in the outcomes of a new venture. However, their importance in the outcomes is not concurrent in the early stages of the venture. In fact, entrepreneurs who spend their limited time and resources worrying about organizational structures sacrifice these critical resources in the development of their business opportunity. While you can get by for a time with a limited organizational structure, you will not survive without a solid business opportunity. Consequently, entrepreneurs should learn what things they can do to avoid spending significant time and resources on organizational structures during the early stages of their new venture.
Here a couple of my quick thoughts.
- You do not need any formalized organizational structure to make money. Being alive entitles you to the opportunity to make money as a sole proprietor. While legal experts will warn you that doing this will increase your exposure to liabilities, I find it of little importance at the early stages of a new venture when I have very few customers (if any) and a poor working business model. Until I am making a larger amount of money or hiring employees, I can’t see why the time and resource needed for this task as essential for my startup.
- Once you are ready to start your organization, consider creating the easiest form of organization to achieve liability protection. In most cases, this is a Limited Liability Company (LLC). What most experts typically suggest is for you to look at what organization makes the most sense for your tax situation. While again this is an important consideration, taxes only matter if you are making a profit. Most startups do not make much (if any) profit in their early stages.
On the flip side, the ease of organization with an LLC allows you to save time and resources on the administration of more complicated organizational forms (e.g. S-Corp, C-Corp). The time saved from not learning and executing the more complicated organizational forms is freed up for more work on your new venture opportunity.
- Finally, you can always change your organizational structure. So why spend so much time on it at an early stage. I get that later on in your organization it is difficult to make changes to the organizational form, but at the beginning, you have less of a history that limits this possible change.
Do what is quickest, easiest, and cheapest early on in your startup. It will give you more time to get your venture running and making money. Then, you will have plenty of money to pay others to figure out the organizational details. This, I suggest, is the better way.