The start of it all- Forming Your Business Entity


As a new entrepreneur, you are probably excited and anxious to begin your business dream (rightfully so). You have worked hard, created the business plan and are ready to turn the entire idea into a successful reality. You likely have a lot on your mind and on your plate, from website design, to landing clients, making sales, renting space, etc. While it could be easy to overlook the legal aspects of your business, it is best to make sure that your business is operating in sound legal manner- you want to protect all of this hard work you are putting into it. While you may think you can’t afford an attorney, you definitely have options that can save you money, while potentially saving your business. Here is some basic info about business formation and some cost-saving options for using an attorney.

Choosing: When starting your business, the type of entity you will form is often one of the first considerations you make. With so many choices, it is important to know the benefits and deterring factors for each type of business entity.  Some of the most important differences to consider are usually the filing requirements, the protection offered and the tax implications of each set-up. It is helpful to speak with an attorney, before choosing your business entity and probably a good idea to also consult with an accountant. While the choice is ultimately yours, if you choose not to form any entity, you may automatically default into a sole proprietorship or a general partnership. A sole proprietorship is automatically created without filing any legal documents, when you begin to conduct business and charge for either a service or goods. You may think “great, that makes my choice easy” but you may want to identify your business needs before you default into the easiest category. A sole proprietorship does not provide any limited liability protection- if your business is sued, your personal assets are not off limits. Taxes are also a big consideration when falling into the sole proprietorship category- this may not be the best tax bracket for you.

Similarly, a partnership can often be created without any legal document filing or contractual agreement (if it walks like a partnership, quacks like a partnership, the courts may find a partnership, even where you didn’t intend on creating one.) While you can create a partnership this way, it is generally not wise to skip the formal partnership agreement or contract, which would outline the specifics of the relationship and cover ways to resolve disputes. This is a small investment that can end up saving you headache, litigation, and even a company dissolution. On the flip side, if you currently work with someone in your business that could be interpreted as a partner, you may want to evaluate the relationship and enter into a specific agreement about that person’s role in your business. If you are not looking for a partner, put it in writing so you don’t accidentally end up with one! So remember, you can never have too many contracts. Lay out the terms of your business relationships (or leases, agreements, etc.) and cut out the guess work and possible litigation.

If you are not sure about what type of entity to choose or if you are already in business and not sure that your default entity is the best for your business, consult with a lawyer and get some more info. Also, if you have a partner or someone that may be identified as a partner- look into getting a contract while the relationships are still good.

Filing: Once you’ve identified the business entity that is right for you, the next step is filing the required paperwork and fees. Each type of corporate entity has different filing requirements and to complicate matters, each State has different requirements as well. It is very important to make sure you file correctly, particularly if you are relying on a limited liability protection of the LLC. Often times, online companies that promise to file your paperwork for a small fee end up doing it incompletely. In these cases, the State may send your company a letter stating that your application was rejected, about one year after you thought all the paperwork was filed. While you may be able to correct this by completing the filing process, you run the risk of not having the limited liability protection during that time. Equally important is maintaining your liability protection, once it is established- you can lose this protection if you don’t follow your State law requirements.

If you diligently conduct all the research on the topic, you may be able to file for formation on your own (which may even be better than filling out a form online for an online company), but you may want to seek some legal advice on the matter. If you are looking to save money, do the research yourself and purchase an hour of an attorney’s time to discuss your options and the best choice for your business, then once you have completed your paperwork, get an attorney to review it for you to make sure you have complied with the all the required elements. While you will have to pay for the attorney’s time, you will gain the peace of mind of a sound business formation and legal compliance.

Best of luck to you on your business formation and the research ahead of you and most importantly, congratulations entrepreneur – you are a step closer to living your business dreams.



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