Do I really need to pick a business entity?
Unfortunately we live in a very litigious society. Gone are the days when a handshake and a promise paved the path for everyday business deals. Today’s business environment is full of taxes, regulations, and lawsuits. Every business owner needs to consider ways to limit their potential liability while they conduct business. The first chain in any business person’s armor is the business entity.
I will go into further detail about the different business entities available in a separate post.
Do you have to choose a business entity? No, if you decided that you will operate a business by yourself and will own the business solely, you don’t have to create a separate business entity. The same goes with partners, you don’t have to create a business entity, you can operate as a partnership and no formal writing is required.
Should you choose a business entity? ABSOLUTELY!
There are numerous reasons for conducting business under a legal business entity but I will only discuss some of the main reasons here. First, operating as a business entity can provide one with some protection against certain civil liability that occurs while operating a business.
For example, Owen decides to start a business and lease a cart in the mall. Under scenario A, Owen doesn’t create a business entity but is a sole proprietor (has no legal entity). Owen signs a year’s lease with the mall and goes to business. Unfortunately for Owen, business is bad and he has to shut down. But Owen has a problem; he is personally liable to pay that year’s lease. This means that Owen will owe the mall for the remainder term of his lease.
Scenario B, Owen forms a single member limited liability company (SLLC). Same as above, except now Owen signs the year’s lease as a member of his SLLC. Still Owen has bad business and must close. This time Owen isn’t personally liable on the year’s lease, his SLLC is liable. What does this mean, it simply means that if Owen properly shuts down and closes and terminates the SLLC, Owen will have no personal liability on that lease.
This is a very simple example of how business entities protect business owners- whether we’re talking about the sole entrepreneur, partners, or corporations. When properly formed and operated, business entities provide a good shield against certain civil liabilities that would otherwise make the business person personally liabile.
The civil liability covered by most business entities ranges from leases to contracts for goods and services to vicarious liability for an employee’s error. A business entity, regardless of type or structure, will never provide protection for a person’s personal torts!
This is the first post in this series. Please check back later for another installment.
Filed under: The Business Entity Life by Mark
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