Having the right business structure
It is impossible to overstate the importance of having the right business structure. Most people starting a business are thinking about their start-up costs, rental space, new logos, etc. Not to mention, the whole prospect of opening a business is scary but exciting.
Because of all these things, most new business owners do not even think about what sort of entity they need to create. In fact, many do not even know that there are different entities. What’s an LLC? What’s an organization? Why does it matter? This information is not necessarily commonly discussed; however, having the wrong business entity can very much be life ending if something bad happens.
We are lucky to live in a time when there are so many options to choose from: LLC, PLLC, organizations, partnerships, PC, etc. These business entities were created to better aid the business owner and give them tax benefits and liability shields. There is absolutely no negatives to many of these structures compared to the default.
Speaking of the default, when people start a business it is usually one of two things: a sole proprietorship; or, a partnership. The only real difference between the two is that a sole proprietorship involves a single business owner; a partnership, as the name would indicate, is an agreement between two or more people.
Both of these business structures do not require any filing with the Secretary of State; rather, they are the default. In both of these structures, the business and the individuals are one in the same. The business owner typically only pays one tax because the business is almost an asset of the individual, not an independent entity. This is bad. Why? Since the business entity is not a separate being, the individual is liable for all of its debts.
Consider the following example: Ray wants to start a business, so he takes out a $50,000 loan for his sole proprietorship. He also signs a contract with a vendor to sell his handmade cat mittens that his new business will produce. Unfortunately, Ray’s new business flops. Because he was a sole proprietor, he is personally liable for the $50,000 loan as well as the damages from breaching his contract.
The other parties can sue him, garnish his wages, and essentially ruin his life. Does that not sound horrible? Who would want this? Despite its shortcomings, 73% of people in America who are business owners are sole proprietors. Let us now look at an LLC or a corporation to compare. LLC’s and corporations need to be filed; they are not created by default. However, what they do is create a separate entity. Meaning, you are an individual and your business is an individual; you are not the same.
Organizations are typically taxed different in what is known as double taxation; however, a filing of an additional paper can negate this. To revisit the last example with Ray; if Ray defaulted on his loan, and the contract, he would not be responsible for either. Why? Because it was Ray’s business, not Ray, who is held liable for the breach.
The only recourse for the other parties is to sue Ray’s business, and if Ray’s business has no more assets, the grieved parties cannot get anything. This is not a way to cheat other parties. If its sole purpose was to cheat others, it would not still be a thing. It is a safety net to protect those brave enough to start a business, but not fortunate enough to maintain one. Starting a business should not hold the potential of ruining the rest of your life.
Starting an organization, LLC, or other entity will not cost you a fortune, but it may save you one in the long haul. Shield Wall Legal, PC, can help you start your business, or restructure one you already have, to avoid the life-altering, life-ending, debt that a failed business can bring you.