“Do I need to set up an entity for my new project or my new business? If yes, why and when is the right time?”
Sometimes, I hear my clients complain: “I’m launching a new venture, or I have a new movie I want to make but I want to have all funds available for getting the project off the ground. Why should I incur the additional expenses of forming a limited liability entity, legal, accounting and administrative expenses, entity taxes, ongoing record-keeping requirements, and other costs?” You may already know that you don’t need a limited liability entity to start your project or business, but you may decide you want such an entity structure, anyway, as the advantages may outweigh the costs.
While you can simply open a business or start working on your project without setting up any formal structure, you will miss some important protections and advantages. If you don’t form an entity and you’re starting on your own, then you will be a sole-proprietorship and if you have partners, you will be considered a general partnership. While this is quick, easy, cheap, and allows you to test the waters without investing in the formation and maintenance costs of a business entity or a registered agent, what happens if you have employees or business partners or try to raise financing or there is a lawsuit or judgment against your project or business? Let’s consider some of the reasons why you may want to form an entity early on despite the expenses.
If you aren’t operating your business through an entity with limited liability and your business has unpaid creditors or if there is a lawsuit, you will be personally liable for any losses associated with your business. There is no personal liability protection for what you own. You also may be liable for the applicable business-related activities of your employees and co-owners, if there are any. While each business entity type has its own benefits, forming any type of entity with limited liability provides protection from personal liability. When you are operating your business through an entity with limited liability, you might lose everything you have invested in the business or project, but your personal assets, home, and bank account are protected. This is one of the main benefits of setting up a business entity with limited liability.
You may want to form a limited liability entity to separate ownership and control of business operations. Through a limited liability entity, you can transfer the ownership of the business to someone else and shift income to associates and co-owners. And if you are trying to raise money or capital to expand or grow your business or project, without having a formal business entity, it will be harder. Banks and investors may be less likely to loan or invest money in a project or a business that is owned by individuals rather than a limited liability entity.
Also, if you’re concerned about protecting the name of your business and marketing your business, you may want to consider forming a limited liability entity. When you form your business entity, you can’t have the same name as another entity of the same type in the same state. So, forming an entity helps ensure that the name you have chosen for your business or project hasn’t already been used by another entity of the same type and nor shall it be in the future.
Another reason to form a business entity is the planning and the formal structure that it provides for operating your business. Your corporate documents setup rules and a framework that can minimize expensive and time consuming later problems. Most people in the excitement of starting their new venture, business or project don’t consider how to run their company, roles and responsibilities of partners, what will happen if there are disagreements, someone wants to sell or leave, how to divide profits and losses, what should be the direction of the business or other related issues. When you form an entity, you have to draft the applicate corporate documents and in the process of doing so, these questions will be answered and resolved.
Once you have decided that you want to form an entity for your new project or business, then you should consider what type of an entity is most suitable. There is no quick answer. Contact an attorney and a tax advisor to speak about the ideal business entity structure for your particular circumstances and venture.
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