Many people have a basic understanding of business entities, such as a corporation or an LLC, but which one is best? Or if, like many times in life, there isn’t a “best” one then which is the better choice? Which ones give you the flexibility to take on partners or investors but still maintain control of your business? How do you negotiate a lease for your space? It’s time to expand and you need a loan: how do you negotiate loan docs, and how are various types of financing structured? What if you’ve chosen an entity but now you’ve decided that you need to go in a different direction? If the business ends (either through selling it or otherwise), what’s the partners’ exit strategy? These are all questions I’ll help you identify and answer, and then create a structure to help give you the peace of mind that a well-designed business provides.
Predictability and the peace of mind it brings. Here’s a bit of a case study (which is common and could have been avoided had the partners sought legal assistance up front): two people decided to start a business together. Neither had any business experience to speak of, but they were adventurous and entrepreneurial so they went for it. The business became pretty successful and generated plenty of cash each month and the partners got along fine. But then one of the partners decided that he wanted to move home to the East Coast and that’s when the questions began arising for them, when money became an issue between them, and when their relationship fell apart. How was the departing partner’s interest to be valued? At a more basic level, what was his interest: was it stock in a corporation or was it a share of the assets’ value? How was he to be paid out? How was he to be protected against a payment default by the partner who’d be remaining with the business? What were the tax implications? As you can imagine, the questions were myriad and it all came to an ugly end. It’s a true example (I came in at the end once the partners realized that they needed help), and is great evidence of the axiom, “an ounce of prevention is worth a pound of cure.”
say you own a business that’s worth $100,000.00, and you hold it in a corporation. You own a house that’s worth $750,000.00, but you hold it in a separate entity (likely your trust, or maybe an LLC or LP). Someone sues your business for breach of contract, and gets a $1,000,000.00 judgment that insurance only covers up to $500,000.00. Where does the plaintiff get the other $500,000.00? Does it proceed against your $100,000.00 business or can she try and sell your house? If you’ve set things up correctly (i.e., seen a lawyer for an ounce of prevention and then closely followed that lawyer’s advice), the plaintiff will likely only be able to proceed against the $100,000.00 business and your $750,000.00 house will probably be safe. This concept is what’s known as “limited liability” and is one of the most tangible benefits of operating through an entity.
The costs vary immensely and depend upon what your business needs. In the case study about the two partners, the costs were high because it was the “pound of cure” that the two partners needed, whereas an ounce of prevention in their case would have cost them a fraction of what they spent on the cure. If you’re a true startup, costs are really not that high and are comprised of filing fees with various governmental bodies such as the Secretary of State, and the legal fees that come with setting up a good structure. After you’re set up, there are recurring taxes that you’ll be charged by the government (such as the annual minimum Franchise Tax that an entity is charged), but they’re minimal.
A lawyer knows what questions to ask, and, perhaps more importantly, we look beyond the present and help you plan for the future. We know what issues will arise that you may not even know exist, and we help you plan for them. In the example of the plaintiff with a judgment, limited liability only works if you’ve taken care of ALL the details and ensured that every “T” is crossed and “I” dotted, and not just in the formation stage: you need to have done EVERYTHING perfectly throughout the course of your entity’s life to maintain it. If you’ve not completely addressed ALL the details, your hypothetical house discussed above could be as good as gone. A lawyer can help you keep track of all the details, and THAT’s what you’re paying a lawyer for: the peace of mind that comes with a well thought out and planned business structure, and the guidance to make sure you’re effectively maintaining it. So, can you do it yourself? Yes, but are you sure you’ll have done everything right and appropriately? If not, the consequences can be catastrophic.