# Business Structure Decision Tree Guide

> **Disclaimer Header Template**: This guide provides educational only content for informational purposes. This is not legal advice and should not be treated as such. Consult a qualified attorney or CPA for decisions specific to your situation.

The disclaimer header must appear in the first 3 lines of any output artifact generated by this skill.

**Canonical Source**: This file is the sole authoritative source and single source of truth for all entity descriptions, decision factors, and professional referral triggers used by the advising-legal skill.

---

## Output Artifact

**Output artifact path**: `devforgeai/specs/business/legal/business-structure.md`

The output artifact includes:
- Disclaimer header (lines 1-3)
- Recommended entity with rationale
- Decision path summary
- Comparison of alternatives

---

## Decision Factors (Sequential)

The decision tree guides the user through four sequential factors. These must be presented in the following order:

### Factor 1: Revenue Expectations

**Question**: What are your revenue expectations for the first 1-2 years?

Revenue expectations help determine the appropriate entity complexity. Consider:
- Under $50K annual: Simpler structures may be sufficient
- $50K-$250K annual: Mid-tier structures offer balanced protection
- Over $250K annual: More formal structures provide additional advantages

### Factor 2: Partners and Co-Founders

**Question**: How many partners or co-founders will be involved?

The number of partners or co-founders affects entity selection:
- Solo founder: All entity types available
- One partner: Most entity types work with operating agreement
- Two or more partners: Increases complexity significantly (see Professional Referral below)

### Factor 3: Liability Exposure

**Question**: What is your liability exposure level based on your industry and operations?

Liability exposure assessment considers:
- Low liability exposure: Service businesses with minimal physical risk
- Moderate liability exposure: Businesses with some customer-facing risk
- High liability exposure: Industries with significant legal or physical risk

### Factor 4: Tax Preferences

**Question**: What are your tax preferences and priorities?

Tax considerations include:
- Pass-through taxation: Income flows to personal return
- Self-employment tax optimization: Potential salary/distribution split
- Corporate tax rates: Separate entity taxation
- Reinvestment plans: Retained earnings considerations

---

## Entity Types

### Sole Proprietorship

**Overview**: The simplest business structure with no formal registration required beyond local licenses.

**Best suited for**:
- Solo founders testing a business idea
- Low revenue expectations (under $50K)
- Minimal liability exposure
- Characteristics: No separation between owner and business

**Advantages**:
- Simplest to form and maintain
- Complete control over decisions
- Pass-through taxation on personal return
- Minimal paperwork and compliance

**Disadvantages**:
- Unlimited personal liability
- Harder to raise capital
- Limited tax planning options
- Business ends if owner is incapacitated

### LLC (Limited Liability Company)

**Overview**: A flexible structure that provides liability protection while maintaining operational simplicity.

**Best suited for**:
- Small to medium businesses seeking liability protection
- Moderate revenue expectations ($50K-$250K)
- Characteristics: Separates personal and business liability

**Advantages**:
- Personal asset protection
- Flexible management structure
- Pass-through taxation (default)
- Fewer compliance requirements than corporations

**Disadvantages**:
- Self-employment tax on all profits (default)
- Varies by state in formation requirements
- May have limited life in some states
- Less attractive to venture capital investors

### S-Corp (S Corporation)

**Overview**: A tax election that allows a corporation or LLC to pass income through to shareholders while enabling salary/distribution tax optimization.

**Best suited for**:
- Businesses with consistent profits above $75K
- Owners seeking self-employment tax reduction
- Characteristics: Requires reasonable salary to owner-employees

**Advantages**:
- Self-employment tax savings on distributions
- Pass-through taxation
- Established corporate credibility
- Easier ownership transfer

**Disadvantages**:
- Strict eligibility requirements (100 shareholders max, US residents only)
- Required payroll and reasonable salary compliance
- More complex record-keeping
- S-Corp election process requires careful timing

### C-Corp (C Corporation)

**Overview**: The most formal business structure, ideal for businesses planning to raise significant outside investment or go public.

**Best suited for**:
- Businesses seeking venture capital or equity investors
- High revenue expectations (over $250K)
- Characteristics: Separate legal entity with double taxation structure

**Advantages**:
- Unlimited growth potential through stock issuance
- Attractive to investors and venture capital
- Perpetual existence independent of owners
- Comprehensive fringe benefit options

**Disadvantages**:
- Double taxation (corporate + dividend)
- Most complex compliance requirements
- Higher formation and maintenance costs
- C-Corp equity distribution requires careful structuring

---

## Recommendation Output Format

The recommendation output structure includes these components:

### Recommended Entity

State the entity recommendation clearly with the entity name and type.

### Rationale

Provide a plain-language rationale explaining why this entity fits the user's specific situation. Use "consider" language throughout. The explanation should match the user's responses to each decision factor.

### Comparison of Top Two Candidates

When scores are close between the top two candidates, include a comparison section showing:
- The runner-up or alternate candidate entity
- Key differences between the top two options
- Factors that could shift the recommendation

### Disclaimer

Every recommendation output must include the educational only disclaimer. This is not legal advice. The content is for informational purposes and general guidance only.

---

## Professional Referral Triggers

When the decision tree encounters complexity that exceeds the scope of educational guidance, a "Consult a Professional" block must be presented. Each referral block must:

1. Explain the scope limitation (why this exceeds educational scope)
2. List the recommended professional type (attorney, CPA, or both)
3. Halt the branch - no further recommendation output is produced after the trigger

The following five triggers require professional referral:

### Trigger 1: Multi-State Operations

**Consult a Professional**: Multi-state operations detected.

Operating across multiple states involves varying registration requirements, tax obligations, and compliance rules that exceed the scope of this educational tool.

**Recommended professional type**: Business attorney and CPA

**Branch behavior**: Halt branch. No further output is produced for this decision path.

### Trigger 2: International Operations

**Consult a Professional**: International operations detected.

International business structures involve treaties, foreign tax credits, transfer pricing rules, and jurisdiction-specific regulations that exceed the scope of this educational guidance.

**Recommended professional type**: International business attorney and CPA

**Branch behavior**: Halt branch. No further output is produced for this decision path.

### Trigger 3: Two or More Partners

**Consult a Professional**: Two or more partners or multiple partners detected.

When a business involves two or more partners, the operating agreement complexity, profit-sharing arrangements, dispute resolution mechanisms, and exit strategies require professional guidance that exceeds educational scope.

**Recommended professional type**: Business attorney

**Branch behavior**: Halt branch. No further output is produced for this decision path.

### Trigger 4: S-Corp Election Considerations

**Consult a Professional**: S-Corp election questions detected.

The S-Corp election process involves IRS Form 2553 timing requirements, reasonable salary determination, and ongoing compliance obligations that require professional tax guidance beyond educational scope.

**Recommended professional type**: CPA or tax attorney

**Branch behavior**: Halt branch. No further output is produced for this decision path.

### Trigger 5: C-Corp Equity and Investor Structuring

**Consult a Professional**: C-Corp equity and investor structuring detected.

C-Corp equity distribution, investor agreements, stock option plans, and capitalization tables involve securities law and complex tax implications that exceed the scope of this educational tool.

**Recommended professional type**: Securities attorney and CPA

**Branch behavior**: Halt branch. No further output is produced for this decision path.

---

## Decision Path Summary

The output artifact includes a decision path summary section that records:
- Each user decision at every factor
- The resulting entity recommendation (or professional referral)
- Timestamp and session context

This provides a complete record of the user's decision path through the tree.

---

## Educational Scope Statement

This guide provides educational only content and general guidance for entrepreneurs exploring business structure options. All content is for informational purposes only and does not constitute legal advice. Users are encouraged to consider consulting qualified professionals for decisions specific to their circumstances.
