Business Formation

There are two major reasons to form a corporation, LLC or other business entity:  (1) limit liability to protect your personal assets and (2) define the operations of the business between two or more people.

Limiting Liability - When a business entity is run properly (simply registering your LLC/corporation is not enough!) you can protect personal assets.  For example, your business enters into a contract with a third party.  The third party believes you violated the agreement and wants to sue.  If your business is its own entity, the third party will have a very hard time suing you as an individual for your personal assets.

Defining the Operations of the Business - Forming a business entity also allows you to define the important aspects of the operations of the company when two or more people are involved.  

What do I mean by "operations"? - There are so many things to think about when running a business with other owners, including the following:

  • Profits - How are profits distributed between the owners, and when is the money distributed?

  • Liabilities - Who is liable if the money is owed to creditors?

  • Voting - What decisions need majority vote, and who runs the day to day operations?

  • Company Property - How is the company property (tangible and intellectual property) split up if your company dissolves?

  • And much much more....

Keep in mind, in most states, simply because you didn't sign a partnership agreement, does not mean you are not considered a partnership.  The downside, the state's laws will define the operations of the business (e.g. everything split equally regardless of whether one partner contributed much more than another).

Have more questions? Contact Colin now.