What To Consider Before Forming Your Business Entity

When starting or buying a business, people often need to think about how they will set up their legal structure. Is it a sole proprietorship, joint venture, LLC or corporation? For best protection from liability, the latter two are often used. An LLC is less paper intensive than a C or S Corporation. For example, I bought a pizza parlor with a relative at 50/50 ownership. We set up a S corporation (requires a special filing with the IRS and is time sensitive) and listed our ownership, prepared the necessary documentation and state filings. Registering as a merchant, including getting payroll and liability insurance were among the many things we we had to do as new business owners.

When thinking about setting up a legal entity, one should speak with and hire an attorney. I have seen new business owners look more at cost savings vs. what services will be provided and the quality of such services when thinking about forming a company. As such, they often go to their CPA, accountant or bookkeeper who often either don’t know what is required or omit doing something which their client will inevitably pay for later down the road.

While one can’t generalize, if using a non-lawyer to set up your legal entity, the only thing that may be done is you receiving a fancy minute book you’d see from the early 1990’s, the actual filing and maybe a consent or misc. item. There’s a lot more to it than that. For example, with regard to corporations, there are Bylaws, Action of Incorporator, board and stockholder consents, Common Stock Purchase Agreements, Indemnity, Employee Proprietary Agreements, cap table, etc.

Prospective entrepreneurs and business owners should do themselves a big favor and shop for competent and quality services, because what will be saved upfront will cost you 2 to 3 times more had it been done right by a qualified legal professional.