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What to Consider Before Forming Your Business Entity

Law Office of Craig Ching, PC Feb. 28, 2022

The Decision to Form a Business Entity

If you are on the verge of starting a new business or own an unincorporated entity that unexpectedly grew to a point where you need to protect your assets, you need to select the right business entity carefully. The decision that you will make is important to the future success of the business.

Commonly referred to as business form or business ownership structure, legal business structures' choices include sole proprietorships, partnerships, LLCs, co-operatives, corporations, and non-profits. But you need to make your decision based on several factors.

Business Debts Liability

As a business owner, you would not want to have personal liability to pay business debts out of your savings if the company incurred the obligation. This is the primary reason to choose the business structure before you start your operations carefully. If you want to have full asset protection, you need to avoid establishing a sole proprietorship business model.

Questions to Ask Before Selecting Your Business Entity

There are several key questions to ask to help you develop a decision when registering your business entity. It includes:

  • Are you running the company by yourself, or are you planning to run it with other people?

  • Will you consider the other decision-makers as your equal partners?

  • Will the others help in the business operation, or are they only investing in it?

  • Do you intend to protect the assets from putative investors like yourself from possible personal liability?

  • Do you want to prevent double taxation where the company gets an initial tax on specific income rather than get taxed again as shareholders?

  • Do you intend to launch an enterprise where you will always be one of the company heads, or do you want a flexible company leadership?

It is often critical to discuss all your options with a business lawyer and a financial advisor to answer each question. They will help you arrive at the best possible decision about the type of business entity that works well for your company to ensure your success.

Drafting Legal Documents

Depending on your chosen type of business entity, you might have to submit state-required documentation. You would need to visit the Secretary of State's website to determine the necessary legal documents needed when forming a business.

If you want to launch a business under a general or limited partnership to share responsibilities and capital with another person, you need to develop a partnership agreement to define your partnership terms. The document must include all the names of the partners involved in the business, the duration of the partnership's validity, and the detailed contributions to the business. The document must also stipulate how you want to divide the labor and responsibilities and add new partners when needed.

If you want to form a limited liability company, you need to file the articles of organization to the Secretary of State. You may also have to come up with a buy/sell agreement if you want to protect your assets from unexpected situations between you and your partner.

Consult with A Business Lawyer

Picking out a legal entity for your future business needs extensive research and added efforts to make sure that you will comply with your state's regulations. It means that you must hire a business lawyer to help you deal with all the business's challenging areas, like drafting and filing legal documents. They will advise you about the local and federal laws. They are also responsible for guiding you about any business debt liability issues. Finally, when you form your business with the help of a qualified business attorney, you are laying the foundation for a legal ally to advise you as you grow.

The decision about your choice of business entity will have major effects on the success of your business. It will also protect you and your partners from unnecessary obligations that could affect your finances. If not done properly, you may have to use your funds to pay for obligations that could deplete your bank account.

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