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It took me a long time to bring formal structure to my business. A very long time. This and the many years I operated with a starter brand identity sometimes left me struggling to prove I could play with the big boys. As a result, it took me longer than it otherwise might have to expand my business and to position myself as a thought leader.

In this column, I’ll share what I’ve learned about business structures—what the options are for independents and what to consider in choosing a structure. (While the legal details might not be applicable to non-U.S.-based readers, the big-picture takeaways should still give you food for thought.)

Step 1: Corporation or LLC?
“No one should be a sole proprietor,” says David Brabender, who, as a partner at Endeavor Law Group in Eugene, Oregon, specializes in advising start-ups and fast-growth companies. “Everyone should have some shield against liability.”

There are two basic structures that provide a shield against liability: limited liability companies (LLC) and corporations. Which you choose depends on whether you’re setting up a solo operation or a “partnership” (multiple member/shareholder organization), how much flexibility you need, what your goals are and which option offers you the best ways to mitigate your tax burden.

My business is a single-member LLC, which is probably the simplest structure to create. I opted to go this route because it was easy to set up and my tax status wouldn’t change. My income is passed through the company to me, the owner. Meanwhile, my personal assets are protected from business liability. As a colleague said several years ago, “They can’t take your house away.”

The Washington, D.C., government’s web site, dc.gov, does a great job of walking people through the various options and steps to set up your business. It took me less than two hours from start to finish, which included figuring out the requirements and creating the necessary documentation.

If you don’t want to be an LLC, then you probably want to structure as an S or C corporation. Like LLCs, income in S corporations passes through to the owner (or partners). The big difference: While every dollar in an LLC is subject to employment taxes, S corporations allow you to pay yourself a reasonable salary (subject to employment taxes) and distribute the rest of the income as a profit distribution. C corporations, the default corporate structure, are taxed at the corporate level—and then again at the shareholder level if dividends are paid to the shareholders.

Brabender told me that most of his clients are opting for either an LLC or an S corporation. He cautioned, however, that you might want to go a different route if you’re looking for outside investors. He noted that venture capitalists and angel investors don’t like to invest in pass-through entities. They’re more comfortable with C corporations, in part because of how the board of directors is set up. And, under certain circumstances, the investors may be able to roll over their investment if the business sells.

Step 2: The operating agreement
Because I’m a solopreneur, it’s pretty easy to define who gets what and when. It’s all about me. But when I did a joint venture a number of years back, you can be sure that we set out who was bringing what resources to the table, how we would handle disputes, and—most important—how any profits would be distributed. In other words, we had an operating agreement.

“Without an operating agreement in an LLC or a shareholders’ agreement in a corporation,” says Brabender, “you have no default document that thinks through the parameters of your business.” He highlighted three things to consider:

• Buy/sell provisions, which restrict the transfer of interest/shares and details what happens if one partner leaves, gets ill or dies prematurely.
• Services for equity, the concept of lower compensation in exchange for a piece of the business. Brabender says that a good agreement will include a vesting schedule over a period of years so that a key employee has an incentive to stick around and contribute to the company’s success. He also pointed out that there are significant tax issues to work through with any services for equity arrangement.
• Founder equity and vesting, both the percentage of equity and at what point you can claim it. Presumably, you’re partnering with someone (or multiple people) because you feel each brings something of value to the table. Without an agreement, however, if one partner gets a “better” offer and jumps ship, then you lose both their expertise and the opportunity to leverage those equity shares to lure away a star employee from elsewhere.

It is also important to recognize that assessing equity isn’t just about whose idea it is. There are lots of ideas, but the value comes from building a successful business—not from the idea itself. Nor should a two-person partnership necessarily be founded on a 50-50 split if one person is bringing all the financial resources, business start-up contacts or something else of greater weight to your start-up.

Finally, legal, tax and liability implications aside, adopting a formal structure also has a business value. Unless you are a freelancer, your business shouldn’t be freelance. It’s a lot easier to make the case for yourself as a business professional if you’re set up to be one. In this era where putting up a web site and printing out business cards is cheap and easy, it is more important than ever that your business signals that it’s around for the long haul.