Setting up the right legal structure for your business may seem like a boring detail that you don’t need to spend much time on. But, in reality, selecting the right entity for your company is one of the most critical decisions you can make as a business owner.
That said, there are all sorts of myths surrounding business entities, and this can cause confusion and lead to costly mistakes. To this end, here are 4 of the most popular myths about business entities and how you can avoid falling for them.
Myth #1: Small businesses don’t need a business entity.
Although it’s possible to run a business without a business entity, doing so puts you—and everything you own—at risk. Without the proper entity set up, there’s no separation between your business and personal assets, so your personal assets would be at risk in the event your business goes into serious debt or gets hit with a lawsuit.
For example, if your company is structured as a sole proprietorship or general partnership and you go out of business, your business creditors would come after your personal assets to pay off your business debts. The same is true if your business is ever sued.
By structuring your business as a limited liability company (LLC) or a corporation, however, you can shield your personal assets from liabilities incurred by your business. When properly set up and maintained, such structures establish your company as a separate legal entity distinct from you as an individual, preventing you from being held personally liable for the company’s debts or legal disputes.
Meet with us, your Family Business Lawyer™ for help selecting, setting up, and maintaining the entity structure that’s best suited for your particular company, no matter how big or small it may be.
Myth #2: There’s no need to set up an entity for your business until it’s profitable.
It may seem like a good idea to delay setting up your business entity until you are actually earning revenue, or even making a profit, but in reality, you should have your entity in place from the very start. This is true not only because liability can arise well before you are profitable, but also because incorporating your business is likely to lead to even more income and profit.
For example, having the proper entity in place in the early stages allows you to receive credit in your business’ name, and raise money from investors. Not to mention, the act of incorporating itself shows that you take your company seriously, which can inspire increased interest from customers, vendors, and financial backers.
Myth #3: A corporate entity offers absolute liability protection.
When properly created and maintained, entities like an LLC or corporation can shield your personal assets from creditors, lawsuits, and other liabilities incurred by your business. However, the protection afforded by these entities is not absolute.
In fact, there are a number of circumstances in which a creditor can come after your personal assets to settle a claim against your business. When this happens, it’s known as “piercing the corporate veil.”
While the corporate veil can be pierced if you commit fraud or negligence, in most cases, it happens due to innocent mistakes. These errors can include inadvertently mixing your personal and business finances, personally signing off on a business loan, or failing to abide by administrative formalities.
As your Family Business Lawyer™, we will support you with maintaining your business records and keeping up with the required corporate formalities. In fact, we offer special maintenance packages that make meeting these requirements a snap, while maintaining the maximum level of protection for your personal assets.
Finally, while a corporate entity can protect your personal assets from liability, these legal structures do not offer any protection for your business assets. To safeguard your business assets, you’ll need to invest in the proper business insurance, which is always your first line of defense.
Myth #4: Incorporating in Delaware or Nevada is always best.
You may have been told—perhaps even by another lawyer—that establishing your corporate entity in Delaware or Nevada is your best bet for tax purposes. But for most businesses, incorporating in these states is completely unnecessary—and it may even cost your company in the long run.
Although many companies do incorporate in these states, it’s for very specific reasons, such as to raise investment capital or take advantage of favorable securities laws to go public. However, unless you are actually doing business in these two states, your company isn’t going to receive any significant tax benefits or additional asset protection by incorporating there.
While Nevada and Delaware do not have state personal- or corporate-income taxes, that doesn’t mean your business will avoid state-level taxes entirely. The fact is, if you are a resident of, or doing business in, a state that has state income taxes, you must still pay those taxes, even if you are incorporated elsewhere.
Plus, if you incorporate outside of the state where you live or conduct business, you must file as a foreign registrant in your home state. Such double filings can result in extra filing fees and administrative expenses that make out-of-state incorporation financially unfeasible.
However, there are instances where it might make sense to set up your business entity in states like Delaware or Nevada, or even Wyoming or South Dakota. Contact us, your Family Business Lawyer™ for advice on the best location for establishing your entity and for support in navigating the requirements for maintaining the entity in each state you do business in.
We Can Help
Setting up the right entity for your business isn’t something you should take lightly or try to do all on your own—there’s far too much at stake. As your Family Business Lawyer™ we will offer you trusted advice on the legal entity that’s most advantageous for your business, while also ensuring that your entity is properly set up, with all of the necessary agreements and other resources in place.
Additionally, we can provide you with a variety of business systems, which will not only make your operation more efficient, but also establish a clear separation between your business and personal finances, which is a vital part of maintaining your entity’s liability protection. Finally, as your Family Business Lawyer™ we will also make sure that you are in full compliance with the various state laws and administrative formalities required to maintain your entity and safeguard your personal assets. Contact us today to learn more.
This article is a service of Daniel O’Connor, Family Business Lawyer™. We offer a complete spectrum of legal services for businesses and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer a LIFT Start-Up Session™ or a LIFT Audit for an ongoing business, which includes a review of all the legal, financial, and tax systems you need for your business. Call us today to schedule.