№ AUSTTX
DS
Attorney
Derek Sullivan
Sullivan & Associates
Business LawIntellectual Property
- City
- Austin
Business Law · Sub-Practice
LLC & Business Formation
Choosing the right business structure isn't a formality — it's one of the most consequential decisions a business owner makes.
§ Overview
What your situation actually involves.
How you form your business determines your personal liability, how profits are taxed, how ownership is structured, and how easy it is to bring in investors or partners later. Getting it right from day one is far cheaper than fixing it after.
Business formation involves selecting the right legal entity — sole proprietorship, general or limited partnership, LLC, S-corporation, C-corporation, or benefit corporation — and then properly establishing it under state law. The most common choice for small businesses is the LLC (Limited Liability Company), which provides liability protection separating personal assets from business debts while allowing pass-through taxation (income reported on personal returns, avoiding double taxation). Corporations, particularly C-corps, are favored by venture-backed startups because they can issue multiple classes of stock, are familiar to investors, and allow equity compensation plans. S-corps offer pass-through taxation like LLCs but with stricter ownership rules. An attorney helps you choose the right structure for your goals, draft the foundational documents (operating agreement for LLCs, bylaws and shareholder agreements for corporations), register properly with state authorities, and set up the governance framework that will govern the business as it grows.
§ Key considerations
- ▸Entity type — LLC, S-corp, C-corp, or partnership based on tax goals and investor expectations
- ▸State of formation — Delaware and Wyoming LLCs have advantages; home state may be simplest for small local businesses
- ▸Operating agreement — who owns what, how decisions are made, what happens if a partner wants out
- ▸Registered agent — required in every state where you do business
- ▸Tax elections — LLC default vs. S-corp election vs. C-corp has major long-term tax implications
- ▸Capitalization — how equity is allocated and whether vesting schedules apply to founders
§ How attorneys approach this
- ›Entity selection analysis — weighing liability protection, tax treatment, and investor compatibility
- ›State selection and name availability search
- ›Articles of Organization or Incorporation filed with the state
- ›EIN (Employer Identification Number) obtained from the IRS
- ›Operating agreement or corporate bylaws drafted and executed
- ›Initial meeting minutes (corporations) and organizational documents finalized
“The most expensive business formation mistake is choosing the wrong structure and discovering it years later when you want to raise capital, bring in a partner, or sell the business. A C-corp in Delaware costs a few hundred more to set up than an LLC but is essentially required if you're raising institutional capital — converting an LLC to a C-corp for a Series A is painful, expensive, and time-consuming. If there's any chance you'll raise venture capital, start as a Delaware C-corp. If you're a service business with no investor plans, a well-drafted LLC operating agreement in your home state is usually simpler and cheaper. The structure should fit the five-year plan, not the first-year budget.”
§ What to look for in an attorney
- 01Business formation experience — not just filing articles but drafting comprehensive operating agreements
- 02Tax law knowledge — entity selection is a tax decision as much as a legal one; coordination with a CPA is ideal
- 03Startup experience if you're venture-backed — C-corp in Delaware is the standard and they should know it cold
- 04Scalability awareness — the structure should fit where you're going, not just where you are today
- 05Operating agreement depth — boilerplate agreements create problems; custom drafting is worth paying for
- 06Flat fee pricing transparency — business formation is predictable work; insist on a flat fee
⚖️
§ Ask these at your consultation
6 questions that matter
- ❓Which entity type makes most sense for my specific goals and tax situation?
- 💰Should I form in Delaware, Wyoming, or my home state?
- 🔍What should our operating agreement or shareholder agreement cover beyond the basics?
- 📋How should we handle equity splits — and should we use vesting?
- 💬What do I need to maintain to keep the liability protection intact?
- 💡If I'm planning to raise outside capital, what structure do investors expect?
§ Frequently asked questions
Common questions about llc & business formation.
Q 01
What's the difference between an LLC and an S-corp?
Both LLCs and S-corps are pass-through entities — profits and losses flow to owners' personal returns, avoiding the double taxation of C-corps. The main differences: S-corps require owner-employees to pay themselves a reasonable salary (subject to payroll taxes), with additional profits distributed without payroll tax — which can reduce self-employment tax. LLCs have more flexible ownership structures. S-corps are limited to 100 shareholders, all of whom must be U.S. citizens or residents, and can only have one class of stock. Many small business owners with significant profits operate as LLCs that elect S-corp tax treatment, getting the operational flexibility of an LLC with S-corp payroll tax savings.
Q 02
Do I need an operating agreement if I'm the only owner?
Yes. Single-member LLCs without operating agreements are treated as sole proprietorships by some courts, which can pierce the liability protection. Without an operating agreement, your state's default LLC rules govern everything — and they may not reflect your intentions. An operating agreement establishes how the business operates, who has authority to bind the company, what happens if you become incapacitated, and how the business is wound up. It also reinforces the separation of personal and business finances that maintains the liability shield.
Q 03
Why do so many startups incorporate in Delaware?
Delaware has the most developed body of corporate case law in the United States, giving courts predictability and legal certainty. Delaware's Court of Chancery specializes exclusively in business disputes and has sophisticated judges who understand corporate matters. Delaware's General Corporation Law is flexible and well-understood by VCs, investment banks, and lawyers nationwide. Most institutional investors and accelerators require Delaware C-corp status before investing. You don't need to operate in Delaware to incorporate there — you pay Delaware franchise tax but otherwise operate in your home state and register there as a foreign corporation.
Q 04
What is a founders' vesting agreement and why does it matter?
Founders' vesting is an agreement under which each founder's equity "vests" — becomes permanently theirs — over a period (typically 4 years with a 1-year cliff). If a founder leaves before fully vested, the unvested portion can be repurchased by the company or forfeited. Without vesting, a co-founder who leaves after 6 months keeps their full equity stake indefinitely — a massive problem for the remaining founders and for investors. Standard startup vesting is 4 years with a 1-year cliff and monthly vesting thereafter. Setting this up correctly at formation, including filing an 83(b) election with the IRS within 30 days of restricted stock issuance, can save founders significant tax costs.
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