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Starting a Business in Your 40s? How to Choose the Right Legal Entity

Posted: 30 Dec 2019 12:36 PM PST

Have you heard that the forties are the new twenties for entrepreneurs? The American Economic Review from the American Economic Association reveals that while observers believe younger individuals are likely to start successful new ventures, new data is revealing the contrary to be true. Today's most successful entrepreneurs are actually middle aged. The average age of entrepreneurs founding the fastest-growing new ventures? It's 45.

Further research reported in Forbes also notes that there isn't any real evidence to suggest young entrepreneurs will always succeed. Middle-aged individuals are actually in their prime for entrepreneurship.

In "Age and High-Growth Entrepreneurship," a 2018 working paper led by Pierre Azoulay from MIT, the authors note that several factors contribute to a middle-aged entrepreneur's success. Most of these individuals have extensive employment histories within various industries, providing them with the necessary skills to make the leap forward with their own business. They also struggle slightly less with financial resources, as opposed to their younger counterparts who need help obtaining capital.

As a business owner who is also in her forties, I have to agree that many of these insights are indeed correct. Over the last decade, I have helped entrepreneurs of all ages incorporate their businesses—including a rising uptick of middle-aged entrepreneurs. However, whether the people I work with are young or middle aged, many question which entity formation is the best fit for their business.

The advice does vary a bit depending on company type and entrepreneurial stage. Through my experience in working alongside middle-aged entrepreneurs, I have found the following three entities provide the best return on investment:

1. Limited liability company (LLC)

An LLC is an entity formation that provides its owners (or members—we'll cover that in just a moment) with liability protection. This type of protection creates a separation between the assets of the business versus the owner's personal assets, including houses and cars.

Middle-aged entrepreneurs often have personal assets they would like to protect. If something unforeseen should impact your business, such as a lawsuit, then personal assets would be safe from any potential seizure.

Why would a middle-aged entrepreneur incorporate as an LLC?

Aside from the aforementioned liability protection, forming an LLC provides the owner (now known as a member) with flexibility. You may decide to form one of three different LLC structures, depending on your business needs:

Single-member LLC—You may run the business as its sole member.
Member-managed LLC—Would you like to own and operate a business alongside another member(s)? You may do so as a member-managed LLC. This formation ensures all members are treated as equals. No one member has more responsibilities or duties than another; all members work equally together.
Manager-managed LLC—Your LLC formation has its own board of managers under a manager-managed LLC. While this may sound as though you are giving another party control over your business, that is often not the case. Many entrepreneurs will form a manager-managed LLC for a series of reasons. Maybe they struggle to delegate duties to an LLC's members, or need help running a business. The board of managers are able to step in and assist the LLC's member(s) as needed.

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Nonprofit corporation

To quickly clarify, nonprofit corporations are not the same as nonprofits. If you are forming a nonprofit corporation, you are forming a corporation founded for a charitable purpose. Eligible nonprofit corporations may apply for tax exempt status through the IRS. Typically, nonprofit corporations file for 501(c)(3) exemption status. This allows corporations pursing nonprofit missions to become exempt from paying federal and state taxes.

As an added bonus, this exemption status also makes it a bit easier for the nonprofit corporation to secure grants and donors.

Why would a middle-aged entrepreneur incorporate as a nonprofit corporation?

Has it always been your dream to help out individuals in struggling sectors, like education or literacy? This is the perfect time to create a nonprofit corporation that gives back and benefits individuals who might be overlooked otherwise.

Certified B Corporation

A Certified B Corporation is a business that has decided it will pursue a higher standard of purpose. The corporation still earns a profit, but it upholds specific social or environmental missions along the way.

However, deciding to form a Certified B Corp is not as simple as it is to file LLC paperwork and pay a filing fee. You must go through necessary requirements, such as taking the B Impact Assessment test and determining if you need to amend your existing company to meet a B Corporation's legal requirements.

Why would a middle-aged entrepreneur form a Certified B Corporation?

There's the initial win-win of earning a profit and doing good. But, if you form a Certified B Corp the payoff is big on a global scale. Your business does not want to be the best in the world. It wants to be the best for the world. Choosing to "B The Change" is a fantastic legacy to leave behind.

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