Guest post by DeAnn Flores Chase
As a small business lawyer, I work with entrepreneurs, business owners and professionals on a daily basis. For new business owners, I advise that an entity be formed from the start. For existing business owners, I advise that an entity be formed as soon as possible.
Business owners have several business entities to choose from, including corporations and limited liability companies (LLCs). In my opinion, it is critical that a business owner choose one, and not do business as a solo proprietor or partnership.
A properly formed and maintained business entity, such as a corporation or LLC, can provide the following benefits:
Personal liability protection
A business entity has its own legal existence, separate and apart from the individual owner(s). Without a business entity, nothing stands between you, as a business owner, and the person suing you, in the event of a lawsuit against you for transactions relating to your business. With a properly formed and maintained business entity, a creditor will be limited to the assets of the entity, and not the assets of the owner(s), to satisfy their claims – including claims that are either not covered by insurance or that exceed the limits of applicable insurance policies.
Establish corporate credit
Many business owners would like to use corporate credit, rather than personal credit, to pay for the obligations of the business. However, just like a college student with a new credit card, a business entity needs time to build up its credit history in the eyes of potential lenders.
Ownership of property
A business entity is a great vehicle to own, not only real property, such a commercial building, but also to own intellectual property of the business, such as patents, trademarks and copyrights. Again, this keeps the property out of the hands of a personal creditor, and identifies the owner for all purposes. This is of particular importance in a partnership situation where the disposition of the ownership of the intellectual property of the business is subject to the terms of a written operating agreement or shareholder agreement – and not the whims of any one particular person.
Simply put, people who do business from a business entity appear to be more professional and business savvy. A business entity can provide a solopreneur operating from a home office more legitimacy, and can increase client confidence by giving the impression of stability and longevity.
A business entity can provide tax benefits to the individual business owner(s), including the ability to write off certain expenses. However, in many cases a business entity may not provide substantial tax benefits due to the “pass-through” nature of the entities used by most solopreneurs and small businesses, LLCs and S-Corporations. I have had many clients whose tax advisers tell them they are too small to bother with a business entity, because it may be a “wash” from a tax perspective and may add some accounting costs. I believe it is the tax advisor, and not the business owner, who is thinking small in this case. I also believe this is irresponsible from a professional perspective.
If a business entity adds some cost to the business venture, so be it. The personal liability protection that comes with a business entity is well worth any additional costs that may be imposed by forming and maintaining a business entity.
DeAnn Flores Chase is the founding partner of South Bay Business Lawyers, which focuses primarily on counseling entrepreneurs, business owners and professionals on protecting themselves and their families from the risks involved with operating a small business.