Choosing the legal structure of your business is one of the biggest choices you will be forced to make when starting a new business. Most small businesses start out as sole proprietorships or partnerships, and this structure seems to work fine for most businesses that don’t have too many assets. However, when you begin to think about scaling your business, you might want to also consider upgrading your business structure classification. Though you may not think that it’s very necessary at the moment, choosing a Limited Liability Company or LLC or even incorporating your business might be a far better fit for your organization. Here are some very important points you’ll want to consider when it comes to this crucial business decision.
Limited Liability and Incorporating Your Business Explained
Before we get into a few horror stories that may cause you to think twice about not incorporating or at least upgrading to an LLC, it’s important to define these terms so that you know what you’re dealing with.
A Limited Liability company is a business structure that protects you, the otherwise sole proprietor, from having your assets placed under scrutiny if you are ever taken to court over your business practices. To put it simply, an LLC will keep you from being taken to the cleaners if anyone ever feels that your business did them wrong in any way.
Incorporating your business is ‘limited liability’ on a much grander scale. Not only does incorporating your business protect you and your assets, but it also protects the shareholders and any executive officers who might be calling the shots behind closed boardroom doors. Speaking of shareholders, forming a corporation means that your business can go public so that people may buy and trade its ‘stock’. The more stock someone holds, typically the more control they have over the company and its direction.
Now that you know what these terms mean, let’s take a look at a couple of scenarios where incorporating your business or forming a limited liability company just makes sense.
Limited Liability Faulty Products
If you make products, there is always a chance that your product could harm someone. Even the makers of Play-Doh, something incredibly soft and non-toxic, have to worry about people becoming harmed by their products. Children could choke on even a small portion of the colorful clay-like substance, after all.
Even the makers of food products have to worry about their products harming others. There are allergies to worry about and, of course, we can always revert back to the choking hazard anytime something is willingly put into the mouth.
If you are the maker of a product and your product harms someone, and you’ve chosen to only form a sole proprietorship or partnership, you could get taken to court. When that happens, all of your personal assets could be at stake. A person who wins a judgment against you just might be able to have access to your home, car, bank account, savings account, stocks, retirement funds and so much more. Not only that, but if you don’t have the assets required to satisfy the judgment, your future wages could be garnished until the judgment is paid in full.
Scared yet? You should be, as the law can be very scary when you find yourself across the aisle at the dependent’s table. Even if you don’t set out to do any harm, anything can happen, and just as you buy insurance for that very reason, you should consider upgrading to a limited liability company if you are currently a sole proprietorship or partnership.
In the above example, if you had gone with an LLC, only your company’s assets would be at stake. You’d get to keep your car, home, savings and everything you’d worked so hard to accumulate. Considering it only takes a few forms to fill out and a small fee, forming an LLC is one of the best moves you can make.
Incorporating Your Business When the Sky is the Limit
Let’s say that you are in your dorm room at Harvard when you suddenly come up with the next best idea that is going to completely transform social media, you’re absolutely sure of it. The only problem is that you don’t have the funds to make your dream come true, so you decide to try to get others involved. You don’t just want a partnership, however. You’re way too ambitious for that.
In an effort to not only get funding, but also get the best minds involved to help make your vision a reality, you decide to split your company into shares that each of your investors will hold. This improves your company’s value and it brings the best minds together. It also gives the owners of those minds an actual stake in the company’s success. Then there’s the fact that the money those investors donate will act as the vehicle that will finally bring your social media phenomenon to market.
Even though you’re only starting a social media site, you should still be considering some form of limited liability. After all, what if someone comes forward and claims that your social media site has ruined their life? They lost their job, their spouse, their kids now hate them and even the family dog has run away. This person now decides to sue you and everyone else behind your new site because they claim it’s the very reason their life fell apart.
While this case would probably be thrown out on such low merit, it’s still a possibility and it would be a headache that you should otherwise try to avoid at all costs. That’s why incorporating your business would make the most sense.
For most small businesses, limited liability works best. If you have much higher aspirations, go with incorporating your business. Either way, you will be able to sleep much more soundly knowing that your all of your personal assets are fully protected. There is no better time to structure your business than right now. Choose one of these structures for your business today and get the process started.
Image Source: dirtyblueshirt on Flickr
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