This time of year, I receive dozens of calls from people with questions regarding whether or not to change their business into a corporation or limited liability company. These calls usually come after years of pestering by their accountants as a result of the tax benefits of such entities. However, many small business owners do not realize the extent to which operating as a sole proprietorship (e.g. using only an assumed business name) or partnership can expose them to personal liability.
For example, do you have an employee who runs errands around town or delivers items to a job site or office? Did you know that if this employee were to get in an accident, you could be personally liable to the other party?
Similarly, have you entered into leases for office space or equipment, or signed contracts with customers or vendors? Did you know that if you were found to have breached any of these contracts, you could be personally liable for damages?
Even more concerning, did you know that as a partner of a partnership, you are personally liable for the acts of your partner?
If properly formed and operated, corporations and limited liability companies can be effective vehicles to protect your personal assets from claims arising out of your business.
Corporations consist of shareholders (the owners), directors (the top-level managers) and officers (the day-to-day managers). Their rights and responsibilities are governed by Articles of Incorporation, Bylaws and various ancillary documents. Sounds complicated, right? It’s really not as bad as you think. One or two people can wear many hats. As for formal meetings, these can be done by written consent or even by meeting around a kitchen table. While there are important formalities, most clients find that once they get used to them, these formalities are really not overwhelming.
Limited liability companies consist of members (the owners) and oftentimes managers. Their rights and responsibilities are governed by a Certificate of Organization and an Operating Agreement. One important decision involved in setting up these entities is whether you want the entity to be manager-managed or member-managed. Before July 2010, I usually advised clients to be member-managed. The Idaho statute changed in July 2010, which now makes manager-managed entities pretty attractive. Limited liability companies give you a little more flexibility than corporations and are a must if you are looking to purchase appreciable assets (i.e. assets that will go up in value). However, there may be some strong tax reasons to pick a corporation, so you should definitely discuss it with your accountant.
If you’ve considered forming one of these entities in the past, now might be a good time to discuss it with an attorney or your accountant. If done correctly, the liability protection of these entities is pretty impressive.
Charles Wright is an attorney at Wright Brothers Law Office, PLLC in Twin Falls, Idaho (www.wrightbrotherslaw.com), where he heads up the firm’s business and transactional practice.