By Attorney Nancy Greene
This time of year is for year-end reviews and parties. It’s the cocktail party cliché. When I say I’m a lawyer the person I’m meeting often “just has a quick question.” When that person is starting a business or thinking about it that question usually is:
I was told I didn’t have to be a corporation to start a business. Is that true?
Before I answer let’s step back. The law is often more concerned about what you can’t do – i.e. you can’t use misleading statements when selling to a consumer – then about what you can do. There’s no law out there that says to be in business you must form a corporation (with a name ending in Inc, Company, or Co.) or a Limited Liability Company (“LLC”). So, technically, you don’t have to incorporate to have a business.
But you should.
A business can operate as a sole proprietorship, partnership, corporation or LLC. A sole proprietorship means your business is you and you are not incorporated. A partnership is when you and someone else run a business and don’t incorporate. A corporation is born when it files Articles of Incorporation and Bylaws with a state. It’s owned by shareholders, and has a board of directors. A limited liability company is also created by filing Articles of Incorporation with your state, but the owners are “members” not shareholders, and there’s generally no board of directors.
As a sole proprietor or a partnership, you are personally responsible for the business’s debts or any claims made against it. On the other hand, shareholders of a company or members of an LLC aren’t personally responsible for the business’s debts.
Because the law views a company as a “person” separate from its owners, officers and directors. A corporation gives you a corporate shield or veil that guards your assets against these claims. So, the primary advantage to incorporating is to protect your assets (your house, your car, your bank accounts) from the business’s customers, creditors and employees.
Okay. I understand why I need a company. But I only need one, right?
Having more than one company may make sense if you have more than one business venture. Let me tell you a story.
Mario’s profitable staffing company, Staff 4 Uz, has excess cash and is looking to expand. It hires a Chief Operating Officer, Willamina. She starts a new construction division within Staff 4 Uz by leveraging the company’s minority-owned status. Staff 4 Uz is awarded several contracts. Williamina’s plan seems like a huge success.
Except. . .
Williamina doesn’t know how to bid a job or run a construction company. The projects go WAY over budget. Staff 4 Uz uses its profits to support a failing construction enterprise. Ultimately, the construction losses are so great that Staff 4 Uz goes out of business. Mario loses everything. Williamina gets another job.
Staff 4 Uz wouldn’t have failed if the construction enterprise been a separate company. Construction 4 Uz wouldn’t have drained Staff 4 Uz’s resources, and Construction’s creditors couldn’t have looked to Staff for payment. So, if your new business is outside your core business line or is very risky it may be better to form a new company for that enterprise to protect your profitable existing business.
Incorporating is an inexpensive way to protect your assets when you have a business.
Invest in your business and leverage the protection the law gives you by incorporating. Any fee the state charges is cheaper than what you’ll pay a lawyer when someone sues you and gives you the peace of mind to focus on running your business and not protecting your backside.
If you need advice related to incorporating your business, or would like assistance with any other business matter, please contact Nancy at Land, Carroll and Blair, PC, in Alexandria and Fairfax, VA at:
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