Does My Business Need a Formal Legal Structure?

Most small businesses start out as a sole proprietorship or a partnership. While these are great forms for some, most businesses eventually transition to a formal structure, such as a corporation or a limited liability company (LLC). Doing so provides numerous legal advantages. Is it time for your business to transition? Here are some considerations.

Do you need to limit personal liability?

A corporation or an LLC formally separates you from your business, thereby protecting your personal assets. If the business is sued, the business is responsible. Generally, creditors cannot go after personal assets. The need to limit liability may not be obvious for some business, however, it is a good idea for most. If a client is injured by your product or at your location are you willing to risk losing your house? As a sole proprietor you are personally responsible for anything your business does. As a partner in a general partnership you are also responsible for your partner’s actions as well. Creating and maintaining a formal business structure can save you considerable expense later.

Do you need more privacy?

As a sole proprietor you use your name, address and social security number for everything. By registering your business your information remains private. You can use a registered agent for the address and a Federal Tax ID number instead of your social security number. Even if you are not ready to formalize your business consider obtaining a Federal Tax ID anyway.

Are you looking for investors?

When you operate a corporation or an LLC you are significantly more likely to attract investors. Investors do not finance a sole proprietorship. They are looking for an ownership interest and that is something that a sole proprietorship cannot provide. If your business plan includes obtaining investor financing you undoubtably should consider a formal business structure.

Do you want to protect your business name?

Registering your business name with the state through either a corporation or an LLC protects your name. Once the name is registered no one else in the state can use the name. While it is still possible that someone in another state will register the same name, protecting it in your own state is a good first step. If you plan on expanding and doing business regionally or nationally, you should consider trademarking your name as well.

This post is for informational purposes only. It is not intended to be, nor should it be construed, as legal advice. Always consult an attorney, licensed in your state, before taking legal action.