Legal

“A governing document that sets forth the basic terms of an entity’s existence.”

English

Often shortened to “Articles”, the Articles of Incorporation (for a Corporation) and Articles of Organization (for an LLC) are the founding document for an entity. Articles are typically filed with the Secretary of State (by way of the local Probate Court) where the entity will be formed. Articles set forth basic information about the entity. Common details included in the Articles are:

• name of the entity
• how long the will entity last
• who owns the entity when it is formed
• purpose
• registered office and agent
• management structure of the entity
• how the governing document will become effective

Articles must be signed by a member or an organizer of the entity. Articles and the Federal Employer Identification Number are typically all that is required by a bank to set up an account.

The filing of the Articles signifies the formation of an entity. It is, however, the governing documents (bylaws or operating agreement) of the entity that matter the most to the owners of the business.

It is important to be very intentional about the items included in the Articles. You want to include what is necessary and prudent for your circumstances, but be careful that you do not restrict yourself unnecessarily by creating a more complex way to adjust how things are done in your entity by placing requirements in the Articles that do not need to be included. Amending the Articles requires filing with the Secretary of State (which will include more filing fees).

A common way to make sure any necessary amendments may be made without amending the Articles is to reference the governing document and state that anything else to do with the company may be outlined in the governing document as long as it does not conflict with the Articles or applicable law. That way, the business will be controlled by the governing document and there will not be as much need to amend the Articles to make changes in the company. This helps avoid unnecessary complexity and filing fees for what would otherwise be simple adjustments to the business.

Remember to keep your Articles as basic as possible while covering all of the required elements.

Legal

“Limited Liability” is defined as “liability of a company’s owners for nothing more than the capital they have invested in the business.”

English

Limited liability is how you protect your personal possessions from being used to pay for any debts, judgments, or other financial obligations created by your entity. Limited Liability is discussed so much in the startup world because it is one of the most important factors you should consider when choosing an entity (such as a Limited Liability Company or Corporation). A business entity that offers limited liability, limits the liability of business owners to their investment in the company. That means, if you start a business that offers limited liability, creditors cannot go after your personal assets (e.g. a savings account, car, or house) to collect on any money owed by the business. This is true of loans (unless there is a personal guarantee), accounts of the business, and lawsuits. If your liability is limited, creditors can only collect money or assets inside the business.

This matters both in the success and failure of a business. If your business is successful, it can become a target for lawsuits. Many successful businesses have been dismantled by one lawsuit that bleeds the business dry. If the business goes under because of the lawsuit, creditors are out of luck because creditors cannot take your personal assets into account to satisfy any business debt they are seeking to collect. Often, a business can run out of money during a lawsuit before any judgment happens because of the cost of litigation (even if there is insurance to cover some of the burden). That means if your business struggles for a time after a lawsuit that cost more money than you anticipated, the creditors cannot look to your personal assets (or other sources of income) to satisfy the judgment they won. Your liability for the judgment of the lawsuit is limited to the entity. That means, a struggling business does not necessarily create a struggling owner. Your business may have a difficult time satisfying some of its debts, but you do not experience the same struggle personally because you properly limited your liability in each of your business ventures.

The protection of limited liability is also important if a business fails. Dissolution of a failed business is like probate. The assets of the business are divided to pay off any existing creditors (or as much as they can) and the owners continue on with their lives. That means if your business fails and you are forced to shut down your business, the creditors go with the business. You will have to satisfy your creditors before you get any money out of your business, but creditors cannot go after you personally for debts incurred in the business.

The concept of limited liability is how successful people keep their money. It is important that you take the proper steps to limit your liability from the start of any business venture. If you take those steps up front and your business fails, you have lost your investment, but not everything you have.

Limited liability may be even more important for those who are building their first startup. Those who invest their life savings, their blood, sweat, and tears into a startup. This is important because you will earn a living from your business and it is important to keep the money you earn separate from the business, so you do not lose it all in a lawsuit or if your startup does not make it.

Legal

Entity is defined as “an organization that has a legal identity apart from its members.”

English

An entity is what most people think of when they think of a business. Because it has an identity of its own, an entity can do most of the things a person can do. An entity can:

• make agreements and sign contracts
• be in partnership with another entity or an individual
• lend and borrow money
• own, sell, lease, and mortgage property
• sue and be sued

In the eyes of the law, an entity is a person.

Forming an entity for your business gives your idea an identity separate from the founders. Because it has its own identity, entities will take on a life of their own and begin to grow. You can nurture and invest in your business, but eventually your business will stand on its own.

It is presumed that a business has an identity separate from its owners. It is important, however, to make sure an entity is completely separated from the owners. To do this, owners must keep their assets separate from the assets of the entity. The entity should have its own bank account. Personal expenses should be paid by the owners themselves and not the entity. Business expenses should be paid by the entity (or the owners should be properly reimbursed). Entities offer many protections to the owners, but an entity must be treated as separate from those members to make sure those protections hold up when they matter most. If the owners fail to treat an entity as having a separate identity, it is possible that the entity may not be treated as separate by courts and creditors.