Assuming you’re starting a new business and are not one of the lucky few that achieve a $1 billion+ exit less than a year after obtaining financing, resources are likely to be tight at the outset of your new endeavor. You’re likely bootstrapping your company and you don’t want to commit your limited resources to legal fees. Having the most pristine organizing documents likely won’t win you any new customers.
Just like its decision on whether/what type of insurance to obtain, every new business should at least conduct an analysis of whether the potential liabilities of operating a business without a liability-limiting business entity is worth the benefit of slightly more resources to deploy in revenue-generating activities at the outset.
In order to make such a decision the business must understand the costs and the benefits of forming a liability-limiting business entity (whether an LLC, a C-corporation, a limited partnership or another). The primary benefit of forming a business entity is to protect yourself – and your co-owners – from personal liability as a result of your business activities.
Without a business entity to shield you personally, if your small business takes out loans, is sued by a customer or otherwise ends up in a dispute where it owes money, and the business does not have the money to pay the liability, your personal assets are accessible by the creditor. However, if you have been operating the business through a business entity which limits liability, only the assets in the business are at stake in a dispute/available to creditors. This is a huge advantage and allows those involved in the business to have confidence that while they’re making a bet with the assets, time and resources they contribute to the business, if the business fails, their bet is limited and does not extend to their home and other personal assets.
Surprisingly, the costs of forming a liability-limiting business entity are quite low. State filing fees vary, but are typically several hundred dollars at the most. The advice of counsel will be an additional cost, but depending on the complexity of your situation, many law firms (AEGIS included) offer fixed-fee services to early-stage companies to draft their governing documents. Merely creating a liability-limiting business entity is not enough to avail yourself of the liability-limiting protections. You must follow certain corporate formalities and avoid actions that could allow a creditor to pierce the corporate veil. Additionally, if you have co-owners, you’ll need to carefully draft your organizing documents to govern the relationship between co-owners going forward.
The above formalities become more complicated in the context of parent and subsidiary companies and other more complex scenarios. This information is intended for informational purposes only. If you like to discuss this article with an AEGIS Law attorney, please contact Alex Prasad (aprasad@aegislaw.com).
