By Vlad Tinovsky, Esq.
Do I really need an entity?
Choosing a form of entity is one of the first major decisions that a new business owner must make. The most common options are a limited liability company (LLC), corporation, limited liability partnership or general partnership. You may lean toward the LLC or corporate route because you like the sound of having “LLC" or "Inc.” after the company’s name, but there are more practical considerations to take into account.
For instance, starting a company means complying with formalities required by state laws. Once the owners of the business agree on some basic matters, such items are embodied in articles of incorporation or formation that must be filed with the appropriate state agency. These essentials usually include:
The bottom line here is that whoever holds a majority of the shares or units of a company has ultimate control over it. Usually it takes a majority of the shares or units to elect the board of directors or managers, which is charged with making the “big picture” decisions. If a decision is momentous enough for the company’s future, such as a change in the articles of incorporation / formation or whether or not to merge with another company, the owners usually have a more direct role in that they themselves must approve the decision by a certain margin of votes.
The board elects the officers of the company, typically including a president, vice president, secretary, and treasurer. The officers may or may not be salaried employees or owners, and in some cases one person may hold more than one office.
At or near the top of the list of characteristics favoring the LLC or corporate structure is the fact that, since the company is treated as a legal “person” separate from the people who own and run it, the owners as a rule are generally not personally liable for the company’s debts. Instead, their risk is confined to their investment in the company. To every rule there is an exception, however, and here the exception has the colorful legal name of “piercing the LLC/corporate veil.” If the owners do not comply with the statutory requirements for running a company, or if they blur the lines too much between company and personal finances, the legal fiction of the company as a separate entity is ignored and the owners are on the hook for the company’s liabilities.
As a separate entity in the eyes of the law, a company does not go out of existence if one or more of its owners dies. Instead, a company stays alive until applicable law or its owners decide otherwise. Transfer of the ownership of the company is accomplished by selling its shares or units. New owners are added either when existing owners sell some of their shares / units or the company itself sells more shares of shares / units. The smaller the enterprise, the more likely it is that the owners, for whom the company may be both their property and their employer, may agree to restrict the sale of the stock / units in order to maintain control. The particular circumstances of each new business and the differences in the governing laws of the states make generalities difficult.
Therefore, a successful new business must first make the appropriate choice of entity decision after careful consideration and planning. Whether choosing an LLC, corporate or other business structure, make sure to consult with a qualified entity formation attorney to ensure your new business takes the necessary actions for success.