Choosing the right legal entity for your business is a key and complex decision and one that will impact your business fututre in many ways.
Contrary to popular belief, starting a business does not just involve visiting state's corporate division online to complete a form. This "5 minutes to file" foolishness has now reached a point of no return, even though the risk and financial payback resulting from this mistake has irreparably destroyed many businesses. Depending on what you are planning to do, there are dozens, and in some cases hundreds of decisions to be made when starting a company. This is a very serious matter and this website contains many articles on this subject for a reason. Some of these decisions are easy and some are not. Some you can handle yourself without any input from a business attorney and some you should not. In addition, all tax considerations surrounding your business should be handled by qualified and knowledgeable tax professionals. For this reason no information is provided here about any tax ramifications except to highlight its importance. Below we discuss only one of these considerations; namely, the correct choice of business entity for your company. This is an important decision for your business, and one that is likely to have consequences in the future.
There are many factors that must be considered when deciding what type of business to form. These considerations include: your particular industry, financial status, investor or creditor demands (third party financing), size of the company, price involved, asset and liability protection, tax implications, growth expectation, employee hiring, ownership responsibilities, ability to make contributions, willingness to maintain formalities and many others. Your business attorney in central Florida should sit with you and carefully review your particular circumstances surrounding formation of your business before choosing a specific business entity. Because tax considerations are a key factor and play a big role in this decision, your business lawyer may request that you consult with a credible accounting or a CPA firm (or do so on your behalf) to ensure that your entity is the most suitable choice for tax purposes. Alternatively, it may be wise to retain an accountant early on to manage your business finances as part of your due diligence in forming a workable business plan.
There are many different business entities to choose from. The list below provides the most common entity types. While there are others, such as family-limited partnerships, limited liability limited partnerships or joint venture arrangements, the two most utilized are arguably limited liability companies and corporations. Please see other pages on this website for more detailed information regarding these specific entities.
When choosing a business entity, one of the most important factors to consider is protection from liability. While frequently intertwined, it is best not to confuse limited liability or liability protection with the term asset protection, which more commonly refers to use of certain techniques and ‘structures' (such as specified retirement plans, trusts, accounts-receivable financing and bankruptcy), to legally protect assets from creditor claims. It is important to accomplish this before there is imposition of liability. In other words, you should consider taking other legal measures to shield your assets from creditors in the event protection from liability does not succeed and these assets become exposed (such as personal liability resulting from piercing of the corporate veil). Because this is a serious matter, and because lawsuits are one of the leading causes for the downfall of businesses nationwide, asset and liability protection should not be taken lightly. Purchasing applicable liability insurance may also be a good idea for added protection and peace of mind. We strongly suggest you contact our experienced Orlando business attorney who can help you choose the right business entity and make other very important decisions when starting your business.
A good example of a high-risk business would be the operation of a nightclub in a major urban or downtown area. In such establishments it is not uncommon for an employee or a visitor to experience higher risk of fall and injury as a result of intoxication. Many visitors don't know how to dance properly, which poses major liability in combination with a slippery service resulting from spillage of alcoholic fluids. There is also an increased risk of fights or disagreements at issue, such as when an angry crowd challenges a bouncer and vice-versa, or when drunk visitors run into each other. For this reason, operating a nightclub as a general partnership may not be a good idea because a general partnership does not protect each partner's individual liability. If a lawsuit is filed against the business, individual partners will be held liable for the affairs of the partnership and their personal assets and property will be in danger. In contrast, and absent certain exceptions, such as piercing the corporate veil, an LLC or a Corporation will shield each member's or shareholder's assets in the event of a lawsuit. Same goes for companies that operate hazardous waste materials or are subject to very responsible or difficult regulatory guidelines. In these situations the risk factor is of such magnitude that regardless of other considerations, a form of business entity that fails to shield your personal liability should not be considered unless absolutely necessary or required. In contrast to a nightclub, a business that exclusively engages in website design does not assume such degree of risk and responsibility, and the contracts between such companies and their clients tend to be well crafted. In addition, the clients of a web designer do not often frequent designer's premises, nor do they invite same amount of liabilities discussed above. Thus, if your liability exposure is of particular concern, and you would like to protect your personal assets, you must consider those entities that can provide adequate protection.
Another consideration is the size of the company and its owners. If only one member, shareholder or a partner owns the business, it's startup documents tend to be simpler and somewhat different from an entity with dozens of equity partners who are planning to go public. For instance, while a shareholder agreement or a restricted stock purchase agreement (or a founder stock purchase agreement with vesting schedule) may not be necessary for only one person acting as a shareholder, a corporation with multiple directors and shareholders may necessitate it. While some organizational documents and formalities may not be necessary for sole ownerships, general formalities required by specific entities should always be observed to prevent an opening and cross over to personal liability. Consult with your attorney or lawyer in central Florida for more information about starting and running a business.
Another issue your business attorney in Orlando should address when considering the best type of business entity is the desire for participation and the assumption of certain obligations and responsibilities of individual partners. How actively do you want to be involved in the daily affairs of the business? How much decision-making power and ownership interest do you desire to have? Who is financing your business? Do you plan to invest all your time, energy and liquid assets into the company? How long do you plan to hold your interest? Do you predict conflict with other owners?
Also important are the practices of the particular industry you are entering into. For example, if nearly every company in your field is doing business as a C corporation, you should conduct your due diligence very carefully before deciding to diverge from the industry norm and form a limited liability company instead. Some questions you and your attorney should consider are: Why is there an industry standard? What is the reason for the consensus in choosing a common entity? How does your business differ from the rest of the industry in providing similar products or services? What are the tax and liability implications? What are your responsibilities? Is international law involved? Do legal and tax professionals agree or disagree with your assessment? Also important is the expected growth factor of your business and your desire to go public. If you expect your company to grow quickly and to acquire financing through creditors and/or investors, forming a limited partnership may not be the best approach, and you should consider the framework offered by a corporation. This decision may also depend in large part on your creditors, who may not offer you favorable or any financing that they otherwise would under a different business model. For instance, as a condition of financing, you may be required to pledge your personal assets to the company as collateral to secure company property, or provide certain guarantees in your individual capacity. Creditors may also require that you obtain their subsequent consent before making changes to the initial structure of your business, which may lead to other complications. Other considerations include relativity and minority status of equity holders (if your husband or wife is also going to own the business), the various tax ramifications to your business and other factors beyond the scope of this article.
Many business start-up and business formation issues can be very complex and are best handled with the advice and representation of professional legal counsel. Hiring an experienced business lawyer can be critical for the future success of your Central Florida business and the protection of your assets. If you are in the process of forming a company in Orlando, Tampa or anywhere in central Florida, and need to decide which entity choice is most proper, we highly recommend that you obtain experienced legal counsel to avoid the risk of paying a hefty price later. Our Central Florida business attorney can be reached by calling (407) 205-2330. You may also complete the online form and our Orlando and Tampa business lawyer will contact you shortly. We have helped many businesses in the past navigate through this maze and would be honored to help you too! We value your privacy and will keep any information strictly confidential.
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