The Unseen Value For Start-Ups And Small Businesses
Start-ups and small businesses could benefit from the advice of legal counsel from the onset. Many start-ups and small businesses scoff at the idea of engaging the services of a qualified attorney when launching or operating their businesses. Often, start-up entrepreneurs and small business owners are concerned with the bottom line and may not wish to stray too far off their budgets. These are legitimate concerns but they, too, must be balanced by what an experience legal advisor could bring to the table. Unfortunately, many choose to avoid attorneys and believe that they alone can avoid all the legal potholes. Subsequently, they discover that something crucial was missed and now have a more pressing issue on hand that will almost require the services of an attorney.
For instance, with regards to a start-up business, the correct entity formation can be crucial. It is of paramount concern that business persons make use of the various business entity formations. The number of individuals involved can dictate the future shape of the entity. A business may take one of several formations such as: (a) sole proprietorship; (b) partnership; (c) limited liability company, or (d) corporation.
A sole proprietorship is an unincorporated business that owned by a single person. There are no essential legal documents that are required in order to start one. It is important to note that the sole proprietorship, unlike other business entities, does not afford limited liability protection. In other words, the business owner is not shielded from the liabilities of the business but is instead personally responsible. This last aspect is enough to make this formation less desirable to many start-ups.
A partnership is an association of two or more people (which in this instance could also mean other legal entities such as limited liability companies, limited partnerships, limited liability partnerships and/or corporations) who have joined together and agreed to engage in a common undertaking and a share of the profits. Indeed, many are commonly referred to as general partnerships. While creation of a general partnership can be done by a partnership agreement, no writing is required and no filings are required by local jurisdictions. Where there are at least two business owners involved, it is usually a good business practice to reduce their agreement in writing so that each individual fully comprehends his or her rights, duties and obligations as partners and to the partnership. Similarly, as sole proprietorships, general partnerships are not recognized as distinct legal entities from their owners. This means that the debts and liabilities of the general partnership are passed directly to the general partners. In turn, general partnerships do not afford any limited liability protection to its owners. Yet, depending on the individual partners, this type of entity may not appear to be unattractive due to its lack of limited liability protection. There are two other types of partnerships: (a) limited partnership and (b) limited liability partnership. These types do require a filing in the state of creation.
A limited liability company, commonly referred to as an “LLC”, is a creature of statute and combines some of the features of a partnership and a corporation, which I will briefly address afterwards. LLC organizers are required to file the requisite legal documents with the state in order to bring the LLC into legal existence. Importantly, an LLC does provide limited liability protection to the members that constitute it.
There is almost not a single person alive that is not familiar with corporations in one form or another. These entities are also creatures of statute and come into existence when promoters file the requisite articles of incorporation with the state. Indeed, corporations are popular and widely used throughout the country because of the limited liability protection extended to its owners, the shareholders.
Now that you are acquainted with the basics of the more popular entity formation, the next step is individually exploring the pros and cons of each one in more detail. I choose to leave this for a late time. In the meanwhile, do not hesitate to contact me if you should have any questions about a pending business venture, start-up or small business.