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Tech startups have formation options

Tech startups have formation options

Tech startups bring different and existing technology products into American markets, use technology to deliver their products and services or act as middleman for businesses such as Airbnb or ride-sharing services. Tech startups also offer many business opportunities and options for business formation and planning.

Different needs

Startups that bring a new product or service might have minimal costs especially if their products are strictly digital. Substantial funding may help business grow and achieve the unicorn business status.

Startups that serve as a middleman may not have high operating costs because they do not deliver the products themselves. But these startups face more competition.

Informal structure

Sole proprietorships and partnerships are informal business structures that meet the needs of business that are just beginning and do not have liability risk. These usually have a small customer base, low expectations for making money when they start out, lower risk, and need low-cost and simple management. Tech startups that want to test the market or turn a hobby or interest into full-time venture also use informal structures.

Sole proprietorships and partnerships use simple business structures and require lower cost and effort to set up. A sole proprietorship has one owner, and a partnership has two or more owners or members.

Owners do not have liability protection for lawsuits against the proprietorship or partnerships. There are no tax benefits because their taxes are filed under the owners’ personal tax returns and there is no separation between the business and its owners.

These entities do not have much credibility and opportunities for branding because owners must use their surnames when opening bank accounts, invoice, receiving payments and marketing their business. Filing for a DBA allows business marketing under a different name, however.

Formal structures

Limited liability corporations and corporations are formal business organizations that are more complex. These also have more complicated internal procedures and tax requirements that have advantages for Tech startups seeking to expand.

These structures also have personal liability protection. Formal business structures have more growth potential because these entities can get better loan agreements and attract venture capital.

A person may file an LLC under a S Corp tax classification to avoid paying self-employment taxes on LLC distributions. Personal and business accounts are separate so the business may attract potential customers by appearing more credible and well-marketed.

Formations and running costs for these structures are higher. More regulations also govern these businesses.

An attorney can provide advice on forming an organization that meets your needs. They can also help assure that its formation meets Michigan legal requirements.