Structuring Your Venture: An Introduction

In this context, structuring a venture means making it a formal entity. It is the next step you take when you want to move your idea from a project or hobby into something that offers value, generates revenue, and is sustainable.

Doing this involves being deliberate about what you want your venture to be, and it is a show of faith that you are invested in your venture for the long haul. The structure you choose for your venture can significantly impact how you operate, what decisions you make, what resources you can get, how to allocate those resources, and how to position yourself in the market, among other things.

📺 To learn more about what it means to structure a venture, watch this video.

Importance of Structuring Your Venture

You might be wondering—I just have an MVP, and I’m a student. Why is it important to think about business structures? Well, if you intend to collect money—either from customers or investors—formalizing your business structure is one way to increase your chances of closing sales and investments. It also provides credibility to what you are building and can protect you, your brand, your partners, customers, and investors.

🪞 Picture this: you applied to Kibo School, and when it was time to pay tuition, you were provided a personal account to pay into. What would your reaction be? Share in the padlet below.

If you are like me, you’ll probably have thought Kibo was not a real school, and you won’t have continued with your application process. This is an illustration of why registering a business is important. Here are a few more reasons to formally structure your venture, including the benefits you get from it:

1. To protect your brand name. So, you’ve thought of a unique name for your product or company as a whole, and you want to start using it publicly. One of the first things you do when formally structuring your venture is to conduct a name search with the regulatory bodies. This ensures that your brand name is not similar to any other product out there. This way, your brand name is unique to you and your product. Can you imagine if Google was not a registered company name, and someone else took their name?
2. Opening a corporate account. It’s important as a venture to separate your venture finances from your personal finances, especially if you’re generating revenue or sourcing for funding. When you want to open this account, any bank will require your registration certificate, which can only be obtained if you have registered your business.
3. Access to funding. If you decide to source funding for your business, your investors will only agree to transfer these funds to a corporate account. Before your investors even decide to give money, they would also want to assess the venture’s structure to see if it is in their best interests. For example, before deciding to invest, angel investors or venture capitalists would want to make sure your venture has enough equity to give them in exchange for their funding or that you have the right limited liability to protect their investment. A well-structured venture gives investors a better understanding of your potential for growth and profitability, making it more attractive for investment. It also has a higher likelihood of attracting external funding that will provide the necessary resources for growth and innovation. Most investors, donors, and grants do not invest in individuals; they invest in businesses.
4. Customer trust and confidence. Being a formal entity enhances your business's reputation to prospective clients. They can better understand the company's potential for growth, profitability, and stability, making it more attractive and trustworthy.
5. Attract good talent and employees. Similar to building customer trust, you want to signal legitimacy so that talented employees are attracted to join your company and contribute to its success.
6. Legal and regulatory compliance. Effective structuring ensures that a business complies with local laws and regulations. This not only mitigates legal risks but also fosters trust among stakeholders, including customers, investors, and regulatory authorities.
7. Business continuity. Imagine you start a venture, and one of your team members decides to leave. Depending on the structure you choose, this doesn't have to affect the entire business.

Understanding the Timing: When to Structure Your Business

Now that you understand what it means to structure a venture and why this is important, you are probably wondering “when” you should structure or register your venture and what types of structure you should consider. We’ll cover that now, starting with the “when.”

The decision to formalize your business involves various factors and depends on the nature of your venture, its growth stage, and your specific goals. While we can provide general guidance, it's important to consider consulting with legal and business professionals for advice tailored to your situation.

With most of the ventures, they start considering structuring their businesses at two key points:

1. When they start receiving payments from customers and
2. When they want to raise funding from investors

This usually happens because most clients, investors, and partners want to know they are doing business with a credible entity that is governed by legal and regulatory compliance before investing, patronizing, or doing business with you. These are not the only times to consider structuring your business. Here are a few other points that can determine when to formalize your venture:

• When You Start Generating Revenue. If your business has reached a point where you are making sales or providing services for compensation, it may be a suitable time to formalize. Establishing a formal structure can provide legal protection, help manage finances, and enhance your professional image.
• When You Begin Taking on Clients or Customers. Interacting with clients or customers introduces a level of responsibility and accountability. Formalizing your business before entering into contracts or agreements can help build trust with clients and protect both parties.
• When Seeking External Funding. If you plan to seek external funding from investors, banks, or other sources, having a formalized business structure is often a prerequisite. Investors typically prefer dealing with businesses that are legally established and have clear structures in place.
• For Legal Protection. Formalizing your business provides legal protection by separating personal and business liabilities. This can shield your personal assets from potential business-related risks and legal issues.
• To Attract Partnerships. If you're considering partnerships with other businesses, having a formal structure can instill confidence in potential partners. It demonstrates that you are serious about your venture and are committed to operating in a professional manner.
• When Hiring Employees. If your business is growing and you are considering hiring employees, formalizing your business becomes crucial. It helps establish employment contracts, adhere to labor laws, and create a structured working environment.
• For Tax Purposes. Formalizing your business allows you to choose a specific legal structure that can have implications for how your business is taxed. It is recommended that you consult with a tax professional to understand what structure best suits your venture.
• When Regulations Require It. Depending on your location and industry, there may be legal requirements or regulations that dictate when and how you should formalize your business. Research the legal requirements in your country and location.
• As You Scale. If your business is experiencing growth and scalability, it becomes increasingly important to have a formal structure in place. This includes clear processes, documentation, and systems to support expansion.

Why these points? Because they indicate moments when external parties, such as customers and investors, are likely to engage with your business. Formalizing your business at these stages provides assurance to partners that they are dealing with a professional and safeguarded entity.

While these examples offer potential milestones for when to transform your venture from an idea to a structured entity, the decision to formalize your business should ultimately align with your comfort level and the stage of development of your venture. Some entrepreneurs choose to formalize early for strategic reasons, while others may wait until certain milestones are achieved.