1. Do I need to create a business entity in order to do business?
The short answer is “no”, but it almost always is advisable to do so, particularly if your business involves more than one person, either as an owner or an employee. Here is an example of doing business without forming a separate business entity: Joseph Smith is a carpenter who works by himself. He can do business using the name “Joseph Smith” or “Joseph Smith Carpentry” or some variation of that name. The legal term to describe his business is “sole proprietorship”.
2. What is the difference between a Partnership, a Corporation, and a Limited Liability Company, and how do I know which form of business entity is the right one for me?
There are very important differences among the business entity choices having to do with personal liability, management, transferability of ownership, documents required to create the entity, and the income tax consequences of receiving distributions from the business entity. Deciding which type of entity is right for you will depend on a number of factors, examples of which are the following: what is the nature of your business; how many owners will there be; what assets will the business likely own; will all owners actively participate in the day to day operation of the business; and, are there income tax reasons to choose one form of entity rather than another. In almost all instances, the decision about what entity to choose will also require advice from your accountant or other financial advisor.
3. If I do business as a business entity, are my non-business assets protected?
A. If your business is a general partnership, your non-business assets are not protected. Moreover, because each partner is liable for the partnership obligations created by each other partner, your non-business assets potentially also are at risk for actions taken by your partners.
B. If your business is a corporation or a limited liability company, your non-business assets are protected, unless you have personal liability for the obligation. Here are two examples:
i. Joe is a carpenter doing business as “Joe’s Carpentry, LLC”. Joe’s Carpentry, LLC has a charge account at Home Depot that was not personally guaranteed by Joe. Joe has no liability for the obligation; Home Depot’s claim is limited to the assets of Joe’s Carpentry, LLC.
ii. Joe is on the way to work in a truck owned by Joe’s Carpentry, LLC. On the way to work, Joe has an accident that is his fault. Joe, as the driver of the truck, has personal liability for any damage he has caused.
4. My partner and I get along fine with each other; why do we need anything in writing?
If you are doing business with at least one other owner, it is extremely important that you have a written business agreement that covers a number of important issues. This is true whether the form of your business is a general partnership, a corporation, or a limited liability company. Here are some of the important issues:
A. What happens to the ownership interest of an owner who dies, becomes permanently disabled, or decides he/she just wants to leave the business?
B. What can you do about an owner who no longer is performing as required?
C. Can an owner sell his ownership interest without your consent?
A well structured agreement among owners anticipates conflicting interests that may arise among owners, establishes a framework for resolving the conflicting interests, and does so in a manner that preserves the continuity of the business while, at the same time, treating each owner fairly.
5. Can I prepare business documents without legal help?
The short answer is “yes”, but it is not advisable to do so. If you use a search engine to search the internet you will find many “do it yourself” or “do it without a lawyer” forms. Choosing the right type of business entity, forming it correctly, and assuring that the entity and the owners have all appropriate legal protections requires the expertise of an attorney.
6. If I ask for your help, how much will it cost me?
The initial consultation always is free. The initial consultation will give us an opportunity to meet with each other, discuss the project in detail, and be certain we have a mutual comfort level. By finding out more about the nature of the legal work that will be required, the initial consultation also will allow us to quote a fee that is fair and reasonable, taking into account the nature of that work. If you are not happy with what we tell you, you have no obligation to proceed any further.