If you’re a business owner or a startup entrepreneur you need to set up the correct entity for your specific business.
You have four basic options:
- Stay a Sole Proprietorship
- Form a Partnership
- Form a Corporation
- Set up a Limited Liability Company (LLC)
Each of these business structures has different benefits and drawbacks.
Businesses often start out as sole-proprietorships or partnerships
These two structures are not advisable because they are both subject to unlimited liability.
Why a sole-proprietor might form a corporation
When you operate a business with another person other than your spouse and you don’t have an entity, by default the law treats you as a general partnership.
That’s not a good idea. As a general partnership or sole proprietorship all of your personal assets are on the line. It would better to form a corporation or LLC so you have some basic asset protection in the event of a lawsuit or accident.
Should my partnership form a corporation?
As a sole proprietorship, everything you own is at risk. As a partnership everything you own is at risk too. But you also have a partner and you’re liable for everything your partner does as well.
That’s an over-simplification but it’s generally true.
So in those cases we might advise a client to form a corporation.
DIAGRAM OF CORPORATION
How to form a Corporation
To explain how the corporate structure protects assets we often draw a diagram of a rectangle divided into three boxes (SEE DIAGRAM ABOVE). There’s one box each for shareholders, directors, and the business itself.
The business is in the corporation and it has officers, employees, and perhaps independent contractors.
The directors hold the power, they hire and fire the officers and make all the policies, but the shareholders own it.
If somebody sues the business, or the business has a huge liability, they can sue the corporation and seize its assets, but they can’t sue the directors or the shareholders directly. The liability claim is stuck.
Of course this is not true in every case. As with everything in law, there are always exceptions.
But generally if you form a corporation the directors and shareholders will be shielded from liability.
Get the Legal Help You Need
Does your business need to form a corporation or LLC? Contact us and we’ll help you sort things out.
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