Are you a baker with dreams of opening multiple locations to sell your tantalizing treats? Are you and three associates pooling resources to form a new tech startup? When you start a new business, you are rightfully passionate about your products or services. With all the excitement, it is easy to overlook the mundane details about organizing your business. You might not realize that starting a business exposes you to new liabilities. How you organize your business is important.
Establishing a Legal Business Entity
Choosing the right way to organize your new business is not an easy matter. You have a number of options, and you want to make sure you chose the optimal organization that provides the best protection without encumbering you with red tape and paperwork. Here are some basic forms of business organization:
- Sole Proprietorship:This is the default organization when you start a business. You are basically identical to your business and personally assume responsibility for its debts and liabilities.
- General Partnership: This form of business is similar to a sole proprietorship except that more than one party is involved in the business. In this case both parties enter into an agreement to run a business. Both parties share the liabilities and debts of the business.
- Limited Liability Company (LLC): An LLC provides some protection to its owners. The owners are not fully responsible for the debts and liabilities of the company. However, they are responsible for paying taxes on the revenue of the company.
- S Corporation: This business entity is fully incorporated and has an independent legal status from its owners. The business owners are protected from any liabilities incurred by the corporation. The owners are responsible for taxes on the revenue generated. The corporation has an indefinite existence and can be bought and sold.
- C Corporation: A C Corporation is taxed on all revenue separate from taxes owed by the business owners. It completely shields the business owners from any liabilities of the corporation. The owners are not responsible for taxes on the revenue of the business; they will only pay taxes if they they receive a salary or receive dividends on their shares.
Business organization is complex. An experienced small business lawyer helps you decide on the best option, understands all the responsibilities and liabilities you incur with each business form, and creates the legal documents necessary to legally establish a business.
Avoiding Liability
It is easy to start a sole proprietorship. You simply start making business transactions. When you are starting up, this might be your best option. Once you start experiencing any kind of success, think more carefully about your business organization.
When you operate as a sole proprietor, you incur all the liabilities for your business. If something should go wrong, your personal assets are on the line. When someone sues your business, your personal savings are at risk as well as your home and any other assets you possess. There is no line between your personal assets and those of your business to protect you. To protect your assets, organize your business in a form that limits your liability. Consider a limited liability company or an S corporation. A lawyer helps you examine your options, choose the best one for your business, and create the legal documentation required to establish a business entity.
There are two other important legal issues to consider:
- Make sure you have a plan to cover any tax liability on the profits from your business.
- If you want to be able to pass along your business to your heirs or to sell it to someone else, establish a business entity that takes on a life its own.
If you have your own business, establish the right business entity to protect you from any liabilities or debts incurred by operating your business. Consult with an experienced business attorney like Company Counsel to cover your bases. This frees you to focus on delivering superior products and services to your customers.
