It’s often a common question that clients ask us when do we need to set up legal entities? When are we okay going without a legal entity and when should we set up an entity? Here’s a few rules and red flags to look for that might indicate that it’s time for you to set up an entity.
# 1 You have multiple people involved. If you have more than one person involved in your business, you’re probably going to want to set up an entity. If two or more persons own a business enterprise than typically it’s going to be deemed to be a general partnership under applicable law. This is bad for everybody because there’s unlimited liability for every partner, for any business debts. This means your personal assets are fully exposed completely. This is something we generally want to avoid.
# 2 We have operations that do not directly involve the owner. So many companies have activities which are just the owners. So very small companies may be cases where we only have one owner involved. Here the limited liability protection is going to be somewhat limited, so it should still be considered, but it may or may not pose as great a benefit. But if we have employees or others involved in the business, then we certainly want to be looking at the entity.
#3 We’re thinking about selling the entity at some point. We may want to go ahead and form the entity sooner than later. It’s a good idea to have all the assets and activities of the business within an entity, even if there’s a single owner because it’s going to make transferability and sale of the entity at a closing, much easier.
# 4 There’s assets in play. Even in the single owner situation, if there are assets of any significance in use, we may want an entity. This could include a house, a vehicle, or other items which the owners not involved in the use of that could create liability, so we want to have that protection to make sure that if something goes wrong with that asset, we at least have the possibility of relying on the reliability protection of the owner.
Now, these are some quick rules and obviously doesn’t cover every case where an owner might have liability, so we always want to examine the individual facts and circumstances to determine whether an entity is appropriate for the situation. We also want to make sure the entity is running properly. As discussed in a prior blog, just because there’s an entity does not necessarily mean the owners get limited liability unless certain things run the correct way. So there’s another step behind merely setting up the entity, the entity has to be run properly. Those are some general guidelines and some red flags to look at when you’re determining whether to set up an entity for your next transaction.
What’s been your experience? Do you know anybody that’s been sued personally for their business activities? How did they react? What would you do differently in the future? How will you protect yourself? Join us in the comments below and let us know about your thoughts and experiences.
This posting is intended to be a tool to familiarize readers with some of the issues discussed herein. This is not meant to be a comprehensive discussion and additional details should be discussed with your attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances. This article should not be treated as legal advice to any person or entity. Freeimages.com/Photographer Robert Owen-Wahl.
About the Author
Shawn McBride — R. Shawn McBride is the Managing Member of The R. Shawn McBride Law Firm, PLLC. Shawn works successful, private business owners in their growth and missions to make a company that stands the test of time. You can reach R. Shawn McBride at [email protected] or 407-517-0064.
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