When I started my first business in 1999, as a young entrepreneur, I wondered, “What’s the big deal with forming a legal company such as an LLC or Corporation? After all, it is only me and a few employees so why bother?” Other people in “partnerships” have thought, “Yeah, he has helped occasionally manage and paid some bills but we are not partners in the legal sense of the word.” My advice, be careful, be very careful! We are just beyond Halloween season after all so danger could still lurk.
These types of thoughts have led to many avoidable legal troubles for small business owners. Understanding the differences between a sole practitioner, general partnership, limited partnership, LLC, corporation or any other business entities can be intimidating. Knowing what is the appropriate legal entity for your business, the levels of protection each provides, and the rules can be a critical component to success or failure.
In the eyes of the law, a corporation is a legal person. Corporations get taxed, they can bring lawsuits, buy, sell and own property, enter contracts, and can even be found guilty of crime. Corporations, LLCs and some other business forms are legal entities created to provide liability protection for their owners. However, to get these shields of personal security, there are rules a business owner needs to follow.
On the other hand, a general partnership can be formed, regardless of whether either participant intended to form a partnership. Indeed, individuals may inadvertently create a partnership despite their expressed, subjective, intention not to do so. Things, such as agreeing to be liable for business obligations or regularly assisting another in management decisions potentially could lead to partnership formation and thus liability.
Understanding these issues and thus maintaining personal financial protection is very doable. Soundly grasping the need, value, and rules required to utilize entity protection for the business and yourself is understandable when explained properly by an attorney. We enjoy helping our clients with entity formation and explaining the dos and don’ts after formation so they feel comfortable using this knowledge as a critical tool for their small business.
Scott C. Bucy is an attorney with the Good, Bucy, Elson and Drescher, specializing in estate planning, trust administration, probate and business law. Contact him or attorney Bob Good at (541) 482-3763.