Protecting your personal assets and family wealth is a primary reason for creating a new legal entity under which to conduct business. If you don’t, claims against your business can reach your personal assets. Even if you are just a sole owner, a single member Limited Liability Company provides you with significant protection at minimal initial and continuing expense. Small businesses which might otherwise be automatically designated as general partnerships (in which all partners are personally liable for the liabilities of the business) can also achieve significant asset protection with a limited liability company, or an “S” corporation, both of which may also provide some tax advantages. The Limited Partnership form is useful where the new business has outside investors who are not going to participate in the management of the company, and can provide limits to the liability of those investors. Larger businesses, or those with more complicated financial or investment structures, can also benefit from the Limited Partnership form, or the “C” corporation, depending on their needs.
The decision as to which form of legal entity to adopt for a new or existing business is a critical decision which requires consideration of many factors such as the expected roles of each owner, the form of capital contribution, the type of startup financing, the type of business, the expected assets of the business, whether real estate is involved, the management structure, the need for future financing or capital, the tax considerations of each owner, compliance with Federal and State securities laws, the prospective market for goods and services, the expected life-cycle of the business, ownership succession issues, the business plan, and others. The goal is to match the needs and expectations of the owners with these factors to select a form of legal business entity which best fits the owners and their business, and maximizes for the factors most important to the owners. It is not a decision to be taken lightly or without professional guidance given the long-term consequences, and the cost and effort required to change entity form in the future.
No matter which form of legal entity is selected, it is critically important that all of the proper steps in formation are correctly followed and completed, and that all initial documents and fees are filed and paid. Otherwise, the owners of the entity may not realize all the benefits, protections, and tax treatment of the entity which they wish to use.
The best foundation for a new business is selection of the correct form of legal entity, the correct formation of that entity, and the regular maintenance of the entity. A relatively small investment at the beginning will likely prevent expensive problems in the future.