Starting your business is an important time. Normally, when lawyers talk about helping you start a business, we often talk about entity selection and what type of entity your business should be. Then we talk about how to choose your entity and what you need to do to get started. Though that is important. In fact, I have blogged about it before.
Today, let’s take a step back and think about what you are doing when you start your business. This is something you don’t often hear about, but it is an important consideration.
When you start a business, you are contracting with the government (and the IRS) regarding how you want your business to be treated and what benefits you will receive in exchange for following the rules for that entity.
Think about that for a minute. Starting a business is entering a contract with the government. There are many options you can consider. But, ultimately, you are choosing the framework of how you want your company to be treated.
Not Choosing an Entity When You Start Your Business is Still Choosing
Even if you don’t choose an entity when you start your business, you have made your selection and you have a contract with the government. Ultimately, if you are building a business by yourself without selecting an entity, you have chosen the sole proprietorship. If you have partners, you have chosen a partnership. There is no limited liability in those forms of business, but you do have rules and laws that impact how you can operate your business and what you must do.
What you have chosen is to contract with the government (and your partners) based on whatever terms the legislators decide should apply to your business. Because you didn’t put it in writing, you are simply agreeing to be subject to the laws as they exist now and as they are changed later.
You Can Prevent that Type of Uncertainty When You Start Your Business
If you take a little bit of time to think about what you want, you can save yourself a lot of headache, a lot of money, and potentially keep yourself out of bankruptcy.
That’s right. Bankruptcy should be your biggest fear.
You have to think about what is at stake.
If you don’t set up your business properly, you may find yourself subject to personal liability if things don’t go well. If you are subject to personal liability when your business fails, you could go bankrupt. You could lose everything.
Working with a lawyer who can give you sound advice on your business decisions. A lawyer who is paid to make sure the legal advice is good. That the advice is viable. Who is paid to make sure you are protected can go a long way in not only keeping you out of bankruptcy, but also in helping your business grow.
You are putting everything on the line to build your business. But, if you aren’t careful, you will be putting everything on the line. A lawyer should be more than a “necessary evil”. Legal is just as important as finance. It is just as important as marketing. It is different, but it is necessary to building a business that doesn’t go away at the first sign of trouble.
One law suit. That’s all it would take. Not having that agreement in writing. Not making sure your agreement protects you in a certain way can make a lawsuit go from a bump in the road where you have to get out of it to a business destroying time and money vortex that not only sinks the business, but leads to your personal bankruptcy. All because you didn’t want to ask someone to help you do it properly. Or because you thought you would get to it later.
Starting Your Business On The Right Foot
Once you have made the determination of your legal entity, you will enter a contract with the government in the form of a Certificate of Formation. In that contract you will tell them how you plan to run your company and when you need to amend your agreement with the government. If you choose a certain tax election, you will enter a contract with the IRS by completing a certain form that outlines what type of taxing structure you want.
Once you do that, you must follow the rules.
Once you have determined how your entity selection impacts your relationship with the owners, you can begin to think of the relationship you want for the owners to have. This is a new contractual relationship. But, it is completely controlled by your relationship with the government. Think of them as contracts that work together. Your agreement with your partners can’t violate your agreement with the government (or the IRS) because, if it does, the government will consider you in breach and you will lose the Liability Protection you were seeking with your entity in the first place.
This is something to think about before you start your business. But, it isn’t too late. If you have already started your business, but did not choose a limited liability entity, you can fix it. You can start now and enter a new relationship with the government.