by Bruce L. Dorner
“I’m starting a business but don’t want to do any legal stuff as I don’t think I can afford it.” This is a very common and real concern for most people who want to venture forth into the Great American Dream — own your own business!
Unfortunately, almost half of all businesses started fail within the first year or two. Why such a high number — because they fail to plan. Most people believe that they have a great idea and hard work is the route to success. After all, what could go wrong with my idea? Well, how about considering the plan for your business. What market will you serve? Who will be your customers? What will it cost to get set up and running? Will you be able to afford payroll for employees? Who will finance your start-up expenses? What form of a business entity will you use? The questions are numerous and the answers all rely upon the great legal expression, “that depends.”
First, develop a business plan. Get it in writing and detail exactly what your business will do and how it will deliver the service or product. Work up a realistic budget for start-up costs and for ongoing expenses. Be sure to include costs for legal services, accounting, and insurance. Don’t try to do it yourself. Remember that you are a business person, not a lawyer, not an accountant and not an insurance advisor. Do what you do best and pay others to assist. Build a team around you to advise you and to help the business grow.
If you need financial backing, decide if you have the family resources to fund the operation. If not, will you borrow from friends or relatives or seek support from a bank. If you need to go to a bank, it is best to have an attorney and accountant working with you to develop the business plan and to assure the banker that you are committed to making this plan work since you’ve hired these advisors to assist you.
From a lawyer’s perspective the big decision is often what type of business entity to use. The simple sole proprietor is often the starting point for a one person business. The benefit of this business form is the need for little legal paperwork, aside from a trade name registration with the State and a tax identification number (unless you want to use your own social security number). On the downside, if your business fails or if law suits against you arise, then all of your assets are on the table for claims made by creditors. In essence, you are the business.
If more than one person is involved in owning and operating the business, we often form a partnership. Although there are variations on the theme, a partnership still leaves gaps in protection for your personal assets, and you may be held liable for errors committed by your partner — even if it was a dumb decision.
For the above reasons, we often form a corporation or a limited liability company. A corporation is much like giving birth to a child. It has its own name, its own tax identification number, and is responsible for its own errors. The corporation acts through its officers and directors. Even though you, the business owner, may be the President, the corporation does provide some protection for your personal assets. However, much like a child, failure to supervise the corporation (child) may expose you to a personal claim. Corporations require specific legal documents and must conduct business in accordance with state law. Don’t let anyone tell you that filing an annual report is all you have to do to maintain the integrity of the corporation. Lawyers have many tools to do what is called “piercing the corporate veil” for the purpose of getting at your personal assets.
The new, and often favored limited liability company (LLC), is used today to reduce some of the need for corporate formality and to provide some reasonable liability protection. Instead of officers and directors, as in the corporation, the LLC uses members and managers to conduct its business. The structure may be less formal than a corporation, but a detailed agreement of the members is still required, as are registrations with the State of New Hampshire.
What form of business is best for you? Again, let’s go back to the top and simply say, “it depends.” You need to meet with a lawyer and accountant to determine what will be best in the long haul as there are often different views as to the best tax and liability protection for your particular business. Making a mistake at the start of your business career may have far reaching impact when you try to sell your growing enterprise. Be sure to plan accordingly. Who knows, maybe you’ll be the next Bill Gates!
This article provides general information only. It is not legal advice. You should consult with your own attorney before making any legal decision.