The form you use to conduct your business has real world consequences.
And this applies whether you’re in a high technology business like biotechnology, pharmaceuticals, diagnostics, medicals or diagnostics, or in a low technology business like consumer products, apparel or personal services.
Many founders, researchers and other entrepreneurs who start businesses begin as sole proprietorships. In other words, the entrepreneur sets up shop or activities and simply goes forward with operations. While that’s the easiest way to get started, it holds some inherent risks.
As a sole proprietor, you have complete control of the operation and all its assets. That’s a plus. But the sole proprietor also has complete responsibility for all the liabilities of the business.
It’s even riskier when dealing with co-venturers in the absence of a written agreement. Courts frequently find that the co-venturers have a “partnership” under State law. That means that the actions of any co-venturer in pursuing the business opportunity could create liabilities for all the other co-venturers. So, a mistake made or liability created by one “partner” can affect all.
The liabilities of a sole proprietorship or a general partnership attach not only to the assets of the business but also to personal assets – think retirement savings, your home, your car, and the college savings account for your children! So, careful counselors advise their clients to form a limited liability entity fairly early in the development of a venture.
A limited liability entity is a legal “person” with defined rights and responsibilities. In general, when properly formed and operated, only the assets owned by the entity are at risk in the business. While there are several types of entities, the most popular of these forms are limited liability companies and corporations.
Limited liability companies are very flexible, simple to set up and relatively easy to maintain. So many entrepreneurs start out using this type of entity.
Typical corporations issue stock to evidence ownership. They have some technical requirement for formation. They also have defined requirements for maintenance and more structure than limited liability companies.
For those reasons, the corporate form is generally favored by outside investors who wish to participate in the venture.
In either case, however, it’s important to conduct business in the name of the entity. Contracts, invoices, proposals and other documents should be seen as coming from the entity rather than from the founder or another co-venturer. And it’s also important to realize that having a limited liability entity is not a panacea for potential liabilities.
Don’t get me wrong – having such an entity is a necessary first step. But it’s also important to explore basic insurance. If a creditor has a claim against the business entity that exceeds its assets, his or her lawyer may try to claim that the limited liability entity was improperly formed or maintained and that the founder or co-venturers are subject to the liability.
In such a case, it’s essential to have an insurer available to defend the case. This potential also underscores the need to have counsel involved in forming and maintaining limited liability entities to provide the enhanced protection that founder need and want from these entities.
That should give you enough to consider for this time. If you need help with any of the issues described there, use the contact form to describe your particular situation and request a free telephone consultation.
The foregoing is intended as a useful summary of some basic approaches to the legal areas covered. It is not intended as legal advice. The application of the materials to your unique situation should be made only with the guidance of your counsel.