The Importance of a Solid Foundation for a New Business

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A business entity (also called a company, enterprise or firm) is an organization, recognized and formed under the laws of the state, that is separate and distinct from its owners. A corporation is a business entity, as is a limited liability company and professional association. Setting up and operating your business as an entity is an important step in protecting your interests as a business owner.

Most businesses operate as a sole proprietorship, which means that the owner and the business are one in the same. In Minnesota, the state requires you to file a DBA (Doing Business As) form if you are operating under a name different than your own.  Aside from that, there are no filing requirements to operate as a sole proprietorship. However, the disadvantages are great. The owner of a sole proprietorship is personally responsible for all the debts and liabilities of the business. A sole proprietorship also does not allow for business succession, as the business often ends with the death, retirement or disability of the owner. It is also difficult to find investors for a sole proprietorship.

In contrast, a business entity such as a corporation provides in most cases a liability shield for the owner’s personal assets against any debts or liabilities that the business acquires. This is not the case for any obligations personally guaranteed by the owner, such as a lease, or when it can be shown that the company was run fraudulently or improperly, allowing  a party to “pierce the corporate veil” and obtain access to the personal assets of the owner. To avoid this risk, it is important that all businesses maintain certain corporate formalities, even if they are small businesses with only one or two owners, or a family-run business. Corporate documents should be drafted, annual meetings should be held, minutes should be written and resolutions should be filed.

Limited liability companies (LLC) are often seen as the entity of choice these days due to greater flexibility in organization and fewer corporate formalities than a corporation. LLCs can have one member and are regarded as a “pass-through entity,” meaning that the profits and losses pass directly to the owner’s personal tax return. Corporations can provide increased tax benefits in some cases and it is often easier to raise capital and find investors with a business organized as a corporation rather than an LLC.

Various considerations, both tax and legal, need to be made when deciding which type of business entity to set up. For this reason, it is best to consult with a professional before making the decision and moving forward.

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