Tailoring Your Business Structure - How to Structure Your Business the Right Way
- Chris Johnsen
- Jun 30
- 7 min read
Updated: Jul 8
A guide to business entity selection and legal governance of ownership structure serves as the foundation for protecting your business interests.
Without the right legal structure in place, even the most innovative companies can run into serious financial and operational difficulties.
Whether you are launching a service business, tech startup, or professional practice, your entity type influences everything from how much you pay in taxes to how you attract investors. A proper business structure selection represents the fundamental choice entrepreneurs need to make when building their ventures.
The correct business structure choice protects personal assets and determines tax requirements and provides a framework for business expansion. For new businesses, this structure can either be an asset or a liability depending on how well it’s tailored to the unique goals of the enterprise.
The following guide provides a step-by-step approach to business creation starting from selecting an entity structure to creating governance documents and handling ownership conflicts. Each decision made during the formation phase influences your company’s long-term sustainability and ability to scale.
Understanding the Basics: Why Structure Matters
The main function of business entities is to safeguard owners from taking responsibility for business financial obligations. In legal terms, this is known as “limited liability,” and it is one of the most important benefits of forming a legal business entity. Your business entity selection between LLC or corporation or partnership or other types determines tax treatment and affects both management structure and investor acquisition capabilities. The entity you choose also defines your operational flexibility and can significantly impact your day-to-day decision-making authority as a founder or partner.
For example, some entities allow for centralized management, while others grant equal say to all members. Some allow investors to hold passive stakes, while others do not. These differences make it essential to select an entity type aligned with your strategic goals and operational realities. A business structure is not simply a filing—it is the legal DNA of your company.
The Selection of Proper Business Structures Requires Careful Evaluation
The decision to choose between an LLC, corporation, or partnership should be guided by your short-term plans and long-term vision. The Limited Liability Company (LLC) structure gives owners liability protection and flexible management capabilities as well as pass-through taxation benefits. The LLC structure works well for small to medium-sized businesses that operate their operations. This option is often favored for its administrative simplicity and tax advantages, especially for closely held businesses without outside investors.
The C Corp and S Corp corporate structures provide businesses with complete liability protection yet the S Corp structure comes with ownership limitations. C Corps separate their taxation from owner taxes but S Corps allow pass-through taxation with ownership restrictions. C Corporations are often the entity of choice for businesses seeking venture capital or planning to go public, due to their scalability and standardized shareholder rights.
The formation process of Partnerships remains easy but this structure does not provide sufficient protection against liabilities. Small business groups which share management duties and risk exposure should choose this entity type. Partnerships should only be used when the partners have a high level of trust, or when legal simplicity is prioritized over asset protection. When choosing among these options, entrepreneurs should also consider how profits will be distributed and how the business will handle internal disputes.
State-Specific Considerations
Certain professions including therapists must form either a professional limited liability company (PLLC) or professional corporation (PC) to meet state licensing requirements. This is particularly relevant in fields such as healthcare, law, and counseling. Many states impose unique regulations on professionals that differ from general business formation rules.
Businesses in certain states maintain anonymity by having their information protected from public disclosure. The establishment of your business in states with strong anonymity protections should be your first choice when privacy becomes important. For instance, forming a business in Wyoming or Delaware may offer greater privacy and flexibility than in other states. These jurisdictions also attract entrepreneurs for their favorable tax laws and pro-business regulatory frameworks. Knowing your state's laws is critical, especially for businesses that may operate across multiple states.
The Core Components of Your Business Exist Within Governing Documents That Serve as Its Foundation
All businesses need governing documents which establish operational procedures and decision-making frameworks. These documents reduce confusion and protect owners from future disputes. The operating agreement of LLCs should be called a company agreement in Texas to specify ownership percentages and management structures and profit distribution methods. This agreement forms the legal backbone of the LLC and must be carefully drafted to reflect actual practices.
Corporations need bylaws together with stock certificates to establish ownership and management authority. These documents dictate how shareholders vote, how officers are appointed, and how financial decisions are approved. A partnership agreement should be drafted by businesses to establish clear responsibilities between partners and their profit-sharing methods. These foundational documents prevent internal disputes and clearly define expectations among owners and stakeholders.
Your Business Structure Needs to Be Designed With Industry Requirements and Organizational Goals in Mind
Example: Therapist in Texas The first step is to verify whether your professional field needs a particular business structure like PLLC or PC. The majority of therapists need either an LLC or PLLC structure to protect their assets and maintain tax benefits. State licensing boards often mandate these structures to ensure ethical and legal compliance. The company agreement should contain provisions for managing the business and distributing profits and resolving disputes between owners. Customization is essential for ensuring the legal agreement matches the daily operation of the business.
Example: Tech Startup Planning to Go Public The preference of investors usually leads them to choose Delaware C Corporations because they understand Delaware law and corporate-friendly regulations. These corporations are recognized globally for their predictability in litigation and clarity in governance. The process of going public or seeking investment capital requires businesses to meet specific legal obligations which include disclosure requirements and securities law compliance. The ownership structure should include shareholder agreements which establish rights and obligations for multiple owners. These contracts also serve to limit internal conflict and define exit strategies.
A Well-Drafted Operating Agreement Stands as the Foundation for Business Success
Most small and mid-sized businesses that have multiple owners require an excellent operating agreement for proper management. A comprehensive agreement sets expectations and provides a clear framework for decision-making. The agreement must determine which members will take decisions and what percentage of votes is necessary to approve important business choices. This clarity prevents power struggles and ensures that no single member dominates operations unfairly.
Your business should include restrictive covenants that prevent owners from both competing against the company and poaching its clients. This is particularly important in service-based businesses and professional practices. The agreement should establish rules for transferring ownership interests to prevent new unwanted partners from joining the business. Many founders neglect to include these provisions, only to face difficulty later when a partner wishes to exit or transfer ownership.
Common Pitfalls and How to Avoid Them
The process of resolving disputes between owners becomes challenging because unclear agreements create confusion. Many businesses that experience partnership breakdowns discover their founding documents were either never created or were too vague to enforce. Business owners who neglect to comply with state laws regarding professional entities and public filings risk legal consequences. These include financial penalties, personal liability exposure, or involuntary dissolution by the state.
Why Experience Matters in Business Formation
A business attorney who has experience in both corporate law and litigation can help you identify and prevent typical disputes. Attorneys with litigation experience understand the practical consequences of poorly drafted documents and can foresee potential areas of conflict. Multiple partnership disagreements throughout the years demonstrate to me that properly designed agreements create better results.
“In the last 15 years I have seen many real-life disputes between partners emerge due to missing provisions in operating agreements or poorly drafted documents or unnoticed nuances.” - Chris Johnsen
This firsthand experience makes all the difference when developing contracts and agreements that can stand the test of time.
Key Takeaways
Select an appropriate business structure based on your industry and state regulations and business objectives. Draft comprehensive governing documents tailored to your business. The selection of your formation state should prioritize both privacy needs and investor preferences. A skilled business attorney should be involved to prevent legal disputes that become expensive. Legal expertise at the formation stage prevents operational disruptions and supports long-term stability.
The Bottom Line
Business formation with proper care safeguards both your corporate assets together with your personal property. A well-designed entity selection combined with precise governing documents and attorney guidance creates a business framework that fosters sustained success while reducing potential legal conflicts. Don’t leave the future of your business to chance. The structure you build today is the legal architecture that will support your enterprise tomorrow. A business attorney for startups and professionals will help you avoid common mistakes and create a company built to last.
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