Legal Considerations for Growing Businesses

PUBLISHED JULY 2025

As businesses grow, they inevitably face greater complexity—whether due to new stakeholders, expanded regulatory obligations, or increased opportunities that demand more formal systems. For high-growth companies, updating the legal structure isn’t just about compliance; it’s also about enabling speed and positioning the business to seize new opportunities. The checklist below highlights key legal areas that business owners should review when preparing for sustained growth.

Corporate Structure. The choice of entity impacts liability, governance, taxation, and investor appeal. Early-stage businesses often opt for limited liability companies or limited partnerships due to their simplicity and pass-through taxation. However, as businesses grow and seek outside capital, investors may prefer C corporations due to their more standardized equity structure, well-developed body of law, absence of pass-through taxation, and options for equity compensation. Limited partnerships may be appropriate in fund contexts, but are uncommon in operating businesses. Reassessing the current entity structure is a critical first step in preparing for growth.

State of Organization. Many growing companies default to organizing or incorporating in their home state. However, many entities also organize in Delaware due to its extensive statutory and case law, courts dedicated to business disputes, and perceived investor preferences. As growth accelerates, companies should consider whether their current state of organization meets the needs of a growing organization. Annual fees, franchise taxes, state income taxes, and regulatory considerations vary considerably from state to state and should be carefully considered when selecting the ideal state of organization.   

Tax Considerations. Growth-stage companies often benefit from reviewing their tax strategy and planning. There are two general categories of taxation: pass-through taxation, where income passes through the legal entity and is taxed directly to the individual owners; and corporate taxation, where income is taxed at the corporate level and then again to shareholders when distributed as dividends. LLCs and S corporations offer pass-through taxation, allowing profits to be taxed only at the owner level. However, as companies grow, the benefits of pass-through treatment may change or diminish, and companies may desire to adjust their tax strategy prior to significant growth. Tax planning must be strategic, particularly if a change has potential ramifications on stock options, compensation, and qualified small business stock (“QSBS”). 

Organizational Documents. Businesses should also closely assess their organizational documents, such as shareholder or operating agreements, before periods of rapid growth. Concepts covered by organizational documents include management structure (board or owner management), voting rights, distributions, equity transfer restrictions, admission of new owners, and buy-sell provisions. Organizational documents that sufficed for early-stage companies seldom work well for companies that are growing rapidly, raising additional capital, or issuing equity to employees. Updating organizational documents can prevent significant, avoidable issues down the road.  

Raising Capital. As businesses grow, they often require additional debt or equity capital to support expansion. Equity financing can result in ownership dilution and significant changes in management and control, while debt financing brings repayment obligations and restrictive covenants. In either case, it is important to comply with federal and state securities laws when raising additional capital.  

Contracting Considerations. As a business grows and changes in ownership or control, it’s important to review key contracts—including leases and customer or vendor agreements—to ensure they support expansion and reduce risk. Attention to restrictive covenants and assignment or change-of-control provisions can ensure that important contracts aren’t adversely affected by strategic transactions. Similarly, paying attention to liability limitations and indemnification obligations can ensure companies assume the appropriate amount of risk.  

Formalizing Employment Practices. As a company expands its workforce, it should adopt more formal employment practices to support growth and manage risk. Key steps include implementing an employee handbook, reviewing worker classifications (employee vs. independent contractor), and utilizing employment agreements for key personnel. For businesses that own or develop intellectual property, it is especially important to have key employees enter into intellectual property assignments and confidentiality agreements. Additionally, the company must stay compliant with evolving state and federal employment laws and regulations.

Incentive Compensation. Attracting and retaining talent often requires well-designed incentive plans. Stock options, restricted stock, phantom equity, and profit interests are common tools, but must be designed with reference to the company’s tax structure and issued in compliance with securities laws and laws governing deferred compensation, including Internal Revenue Code § 409A. Companies should establish clear vesting schedules, valuation and management approval procedures. Even non-equity arrangements may be considered securities and should be structured accordingly.