Why It’s Important to Organize Your Business Entity

Starting a new business is a daunting task that takes courage, time and dedication. It often is an exercise in deploying limited resources available for the most effective startup. You know your business and know it well.

Thinking about legal issues and involving an attorney in your world can make your stomach turn. However, protecting what you are working so hard for requires some important consideration of whether to form a business entity.

When it comes to security and protection for you and your business, consider the following reasons to organize your entity.

Protect Your Assets

Everything you own is on the line. If you conduct your business without the protection of an entity, you are personally liable for any mistakes your company makes. That means that if you get sued, all of your personal assets can be taken from you up to the amount of any judgment: your car, your house, your dog (not really, nobody wants your dog).

You have worked hard for the “stuff” that you have. Do not allow your creditors and judgment creditors take it away. A properly formed entity such as a corporation or limited liability company (LLC) with the necessary documents and disciplines will protect you and your stuff in the event the worst happens.

The necessary documents include an operating agreement or bylaws, annual and special meetings, etc. The required disciplines keep your personal and business operations distinct and separate from each other.

Protect Your Interest

If you have a partner or multiple partners, forming the entity forces the group to decide on how much each person owns and sets ground rules for how you interact with each other. It is important that among partners you do not rely on oral agreements and ambiguous understandings.

Remember that real trust does not reside in handshakes. You can really only trust someone who is willing to put his or her agreements in writing.

It is important to address how decisions will be made, whether a partner can sell an interest in the company and what happens in the event of a death, disability or divorce. For example, in the case of a partner’s divorce, you may have just inherited that partner’s ex-spouse as your new partner without properly written agreements in place.

Protect Your Credibility

Credibility is the currency of small business. One of the biggest obstacles a small business faces is the perception that a bigger company can provide better service and results despite that fact that your small company can deliver better results at better fees with better service.

One equalizing factor is whether you have organized your company into an entity recognized by law. There is no special category for big companies under the law. Your one-person corporation is as much of a corporation as the largest multi-national corporation.

The Inc. or LLC designation included in your company’s name shows your potential clients that you have taken the necessary steps to be a serious and credible organization.

Protect Your Funding

Not every small company is looking for equity funding, but every investor will require that your company be organized as an entity.

Investors are looking to deploy investment dollars as safely as possible. They understand the common language of LLCs and corporations. Knowing that their investment and the company itself are protected is an essential consideration in their investment decision. I

n addition, most banks require evidence that your business is an entity before opening a business account.

Protect Your Deductions

Tax laws are extremely complex, but forming an entity can create opportunities to reduce some of your business tax liabilities. Each type of entity receives different tax treatment.

For example, the difference in the taxation of a corporation versus a limited liability company can be similar to speaking two different languages. There are so many different approaches to taxation that you have to decide what is best for your situation after close consultation with your tax advisor.

It's a Smart Decision

Of course this list is not exhaustive, but the message is clear: If you have decided to go into business for yourself or with partners, or if you are ready to take that hobby to the marketplace, organizing your efforts into an entity is a smart decision.

Do not assume that cost will be a barrier to forming your entity. Take some time to do your own research to learn what is important to you in an entity.

Speak to a few attorneys who specialize in forming entities and offer free consultations or flat fees. The attorney-client relationship is highly personal so be sure to find a competent attorney for a reasonable price who marches to the beat of your drum.

Photo by Jean Scheijen on FreeImages.com

John Herbert is a partner at Herbert Sparks Law Group, LLC with a focus on small business law, providing relevant legal solutions at flat-fees. He his practice spans clients on five continents and hoping for Australia and Antarctica.


This content of this post represents the views and opinions of the author alone, and does not constitute legal or professional advice. For more information, refer to our Terms of Use.

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