2.3: Chapter 8 Business Structure

Business Structure

You don’t need a partner

DON’T START WITH THE ASSUMPTION that you need a partner. That’s a mistake that I see far too often. Give yourself more credit than that.

You’re an entrepreneur, right? Figure it out yourself!

I interviewed fifteen successful parallel entrepreneurs for this book and focused a lot on their skill sets. There are at least a dozen common tasks that employees at software companies have to do, everything from coding to running marketing campaigns and analyzing finances. You might be surprised that only half of the entrepreneurs I spoke to could write their own software.

If you want to put yourself among the ranks of parallel entrepreneurs living the high life with a skill set that you can deploy anywhere, then you should do as much as possible yourself. Not everyone is going to be an engineer. No problem! You can learn to do everything else and delegate the rest.

Max Altschuler is great at outsourcing. “In most cases, I find it best to leverage my expertise, experience, network, and money to work for me, instead of having to do too much heavy lifting. My time is worth more than it would cost someone more proficient to do it for me.”

Max is the sole founder of Sales Hacker and outsourced all his technical development. This is not unusual. Jonathan Siegel told me of the many managers he’s hired and worked with, he sees no correlation between success and how technical the manager is. This is from a guy with three degrees in computer science!

The most important benefit of not having a partner is the lower bar to profitability and freedom.

I started this section telling you that you only need 100 customers to be successful. Well, that’s only true if you do this yourself. If you have a partner then you need 200 customers. If you have three partners, then you need 300 customers. You see how this math works?

If it takes two years to get 100 customers, then it might take another year to get a second 100 customers. You’ve delayed your freedom by a year. And for what? Nine times out of ten it’s completely unnecessary.

A far better approach is to get those 100 customers on your own. Then you’re free.

And now that you’re free, you can choose to either continue as a solopreneur or bring on a partner. You can start that partner part-time or use some of your savings to go in the red so long as you’re certain that future growth will put you back in the black. Or you can take out a small business loan.

The best news is this: you can still own 100% of your business after you bring on this partner. In fact, this partner is really just your first employee, but you can bestow upon them a “partner” status and grant them equity if it’s warranted.

Or not. You’re the boss. You have the keys. It’s totally up to you.

The standard blueprint for solopreneur success is to be a good product manager and an excellent marketer. Tactically, you should focus on the marketing. No one is in a better position to compel the market to try and buy a new product than the founder.

You can outsource software development. You can even outsource product management so long as you have a clear vision of the final product, sketches or mockups, and a very specific list of features for your MVP.

You should not outsource your marketing. Certainly not all of it. You can hire talented freelancers on websites like Upwork to help with design, paid advertising, and content creation, but whether you like it or not, as the sole founder of the company, you are the chief marketing officer.

If you don’t like it, or if the hat simply doesn’t fit, then you should stop your entrepreneurial journey right here or find a business partner who loves marketing with the same fervor that you love building or managing product.

Let’s look more closely at that option.

If you do have a partner, then product and marketing should be evenly split

Initially, your business structure and your team structure should look like this.

Co-founder A: Runs marketing (and usually is the CEO)

Co-founder B: Builds product (and usually is the CTO)

To make the distinction clearer, here are the two critical pathways to launching a product: marketing and product development.

The allure of having a partner is strong. You may decide, as I have, to partner with people who have a unique ability to succeed at marketing activities. This is why I chose to have a partner for Inlistio and I’ve recently begun another business with a different partner.

In both cases, my partners help on the marketing side so I can focus on product. With many parallel businesses running, I can’t do it all anymore. Having business partners helps me scale.

I’m good enough at building products to produce a “minimum viable product” (MVP) for any idea. As a result, I don’t need engineering help. That part is easy and enjoyable for me. The hard part, and what I don’t like as much, is launching and getting the first customers to use my product. I get what might be called “marketing block” and clam up, look away, and go back into the code.

A good partner for me is someone who loves to promote products and has direct access to a network of potential customers.

Here’s a truth that most entrepreneurs learn the hard way, myself included: Good products don’t sell themselves.

It’s true. You can spend all of your time or somebody else’s time refining every last pixel, squashing every bug, and releasing every possible feature for your ideal customer. Without marketing, though, your project is toast. It doesn’t matter how good or how beautiful it is.

It took me ten years to say this but here it is: marketing is everything.

So I don’t partner for the sake of partnering. I’m very selective about whom I work with now, especially if the partnership involves a separate entity that we share ownership of.

Under no conditions should you have a third co-founder. If you go that route then you are adding 50% more friction to your decision-making process, extending launch times, and ultimately delaying your ability to support yourself by at least a year.

The decisions you make about business structure and who you start your business with are fundamentally critical decisions. You should not take any of them lightly. If it blows up in your face, a bad move here can and will doom your business. Business partners don’t go away easily. When they do, it leaves a permanent scar.

Michael Lovitch, co-founder of the prestigious Babybathwater Institute and a supplements e-commerce company, says, “You always need to build better teams.” I completely agree, and in that quest for perfection you may need to let go of employees.

It’s a lot more difficult to let go of business partners. You can avoid that trap by hiring your top talent instead of partnering with them.

Only have a partner if it’s absolutely necessary and you’re completely sure that there’s no other way to do it.

Structure your business as a LLC

Toofr is a LLC (limited liability corporation). Scripted was a C-corporation. I’ve done it both ways, and I can tell you something with great certainty: LLCs are much better.

C-corporations allow you to create a large operation, grant options to future employees, issue stock to investors, build a board of directors, and take your company public. This is overkill. You don’t need it when you first start your company, but everybody wants to form C-corporations. Don’t follow the hype!

You absolutely should create a separate business entity, though. It’s cleaner for tax purposes, demonstrates legitimacy to your customers, and ultimately protects you from lawsuits that might impact you personally.

Also if you decide to sell your business it’s a clean break from you personally. Your business interests are all tied together under the business structure. The legal documents are easy to understand and the transaction fees will be minimized.

Here’s a breakdown of the differences between each type of business structure.

I prefer LLCs because they give all of the same legal benefits as a C- or S-corporation without the reporting requirements.

When it comes to taxes, your single-member LLC is filed along with your personal income taxes. It’s called a pass-through entity because the profit or loss from your LLC is presented on the IRS Schedule K form with your personal taxes.

You don’t need to file anything separately for your business. This is a huge benefit for solopreneurs. Any tax accountant can do this for you for cheap or, if you want, you can do it yourself using TurboTax.

It’s all documented and been done literally a million times by thousands of entrepreneurs just like you. When I file my Toofr LLC taxes, I just send my tax accountant my annual income statement. She’ll ask me a few clarifying questions about it and that’s it. She only needs one piece of information from me. I pay about $300 per year to prepare and file my personal and business taxes.

All of my other businesses fall under Toofr LLC. The income and expenses for Inlistio, eNPS, Thinbox, and everything else go under Toofr LLC and are filed together. I don’t have a separate LLC for each internet business because it doesn’t matter. There’s no benefit to doing that.

I’ll explain in the next section how I account for them separately, but for legal and tax purposes, it’s actually just a single business. I can only think of one very good reason to break them into separate entities: an acquisition. Until then, they’re all under a single legal umbrella.

Here’s a quick breakdown of the costs to form and operate a LLC in California. Exact costs will vary from state-to-state but they’ll all be roughly the same.

Formation

• $20 filing fee. It’s a single form you can fill out yourself or use any number of online services.
• $800 initial minimum tax. Send a check and simple paperwork to the Secretary of State.

Operation

• $800/year minimum tax due to the State Franchise Board.
• $100/year in additional accounting overhead and/or TurboTax fees.

Eventually these costs won’t matter. They’ll be a drop in the bucket. But when you’re starting out, dropping a minimum of $1,000 per year just on legal and taxes feels excessive. Funnel that frustration into marketing and developing your business. It will sting less the second year, and by the third year you won’t even think about it.

You should create the LLC no earlier than when you start spending money to market and build your business and no later than when your customers start paying you. You can do everything as a sole proprietor without a federal employee ID number (EIN) but for protection and organization, I recommend forming an LLC.

Another important characteristic of the LLC is it doesn’t have shareholders. The owners of a LLC are called “members” and each member has a specific percentage ownership of the LLC. If you’re a single founder, you can file in your state as single-member LLC which of course implies that you’re the owner and have 100% of the membership.

If despite all my warnings and explanations above you decide you need to have a partner, then you and your partner will have to decide how to split up the membership.

It’s easy to split it right down the middle with each partner getting 50% of the LLC. Be wary of that arrangement.

If anything should go astray, you will not have control of your business. If it’s your idea, you got started first, and you’re putting in more of your own time or money to launch the business, then you should get at least 51 percent. Your partner should be okay with that.

It may feel adversarial at first, but if it’s the true, honest depiction of the reality of how your business started, then a good partner will understand. I’m not a small business attorney and won’t go into what that 51% gets you in the case of a conflict, but it will make it far easier to resolve disputes when you have the majority stake. It’s worth the awkwardness upfront to have that assurance.

The other implication is you won’t be able to give your future employees stock or options. I’ve decided that I’m okay with this. Employees shouldn’t count on stock in a small business to be of any value, and you shouldn’t feel pressured to offer employees liquidity. Your goal here is set yourself up for financial freedom. Instead of giving them stock, give employees a great place to work, chances to grow and learn, and a nice paycheck.

But we’re getting ahead of ourselves. By the time you can afford to hire full-time staff, you’ll already have a successful business on your hands. You can do whatever you want, including converting your LLC into a C-corporation and taking your company public.

Cross that bridge when you get there. Two-thirds of the parallel entrepreneurs I interviewed agree: Start your business as a limited liability corporation.

Open a separate business checking account as soon as you start spending money

Another reason to form your legal business entity is you’ll need it to open a business checking account at your local bank.

Until then, since you may incur costs before you officially form your business, I recommend opening a second personal checking account. You or your accountant will be glad you did. It’ll keep your financial data clean and easy to follow. This will pay off down the road, even if you decide not to form your legal entity for a year or more.

I can’t overstate how important it is to keep clean books. Simple hygiene like this pays dividends later on. When you lose track of your finances you lose track of your business. You can’t operate as a solopreneur if you don’t know where your cash is going, how much your marketing and development costs each month, and how deep of a hole you’re digging before paying customers start to bail you out.

A dedicated checking account, whether personal or business, is a must-have when you start your business. By the time you’re earning income, you can make a new business checking account, transfer the balance to it, and close your second checking account. Your accounting software will tie the accounting histories together.

The main difference between personal and business checking is your business account will have your business name, which looks more professional for accepting checks and wires, and typically will include features that allow you to give access to employees and accountants. So while it’s preferred to have a business account, you can get by with a personal one. You just need to keep your business income and expenses separate from your personal life.

When you start running multiple businesses in parallel, I’ve found that you can funnel the income and expenses into the same business checking account so long as it’s easy to separate them in your accounting software. I’ll dive into this tactic more in the next section, but suffice to say for now, you can run multiple businesses on a single checking account. Create a new checking account for your second or third businesses only when the bookkeeping process requires it.

Summary

Simplicity pays. My recommendations here are the simplest way to structure your business. A single founder (you) doing both marketing and product activities provides the lowest hurdle to financial freedom. It also allows you to create the simplest form of a limited liability corporation, the single-member LLC.

Start with the assumption that this is the best route. Challenge yourself every time you think you need a partner. If you absolutely need a partner now and can’t wait a year or even six months when it will be much easier to justify having a majority of the LLC membership, then make every effort keep for yourself at least 51 percent.

Finally, there’s no excuse to mix your business and personal funds. Any bank will grant you a second personal checking account. If you haven’t created your LLC by the time you’re starting to spend money on your business, funnel all expenses (and eventually income) through that second personal account. When the income comes, immediately create the LLC and a business checking account and then transfer the balance to it and close the second personal account. You can tie the histories together with your accounting software.

These steps are critical to laying a foundation of clean ownership, expectations, and financial data.

Do not underestimate the importance of being very diligent at this stage of your business!