Things change. Things go wrong. Of course, change can be good and things will often go right. When it comes to business, though, the core structure should not be as fickle as relationships often prove themselves to be.
Our clients tend to acknowledge that formally organizing their businesses as some corporate variation is necessary. The problem is that they often do not know the concrete advantages of doing so. Yes, that “Inc.”, “Co.”, or “LLC” designation will afford some credibility with other businesses. Sure, attracting capital investors and accessing credit become less burdensome milestones. And yes, there is upside in how taxes are assessed on revenue. But each of these respective upsides varies from business to business. Most importantly, none of them accommodates the risk inherent in building and transacting your enterprise.
In our initial consultations with business clients, we are sure to make one thing in particular very clear: the business itself is our client. We do this, among other reasons, to demonstrate that our utmost concern as legal counsel is advising decisions that are in the best interest of the business as a whole now and in the future. From the outset, it is important our clients appreciate that things change and things go wrong. Indeed, relationships (d)evolve and the business opens itself to liability.
Therein lie the foundational reasons for formally organizing your business to be more than a sole proprietorship or de facto partnership—effective management structure and personal liability protection. These are the upsides that accommodate the business risk mentioned above. Management structure is handled in a company’s operating agreement or bylaws, depending on the type of corporation formed. The personal liability shield is achieved through the proper filing(s) as a matter of state law.
With regard to management structure, the practical reason for affirming the client to be the business itself is simple. The operating agreement or bylaws will ensure, no matter how much the relationships between members, officers, or directors change over time, that the business operations will not suffer as a result. While managing documents are not unique to corporations (any business can execute their own version of such), properly drafted operating agreements or bylaws will be tailored to anticipate a business’s unique needs, from managerial decision-making to proposed capital contributions. It is worth noting that creating and assigning roles and allocating authority within the business in the early stages, when member relationships are typically at their peak, is the best time to anticipate internal problems and craft preemptive solutions.
The second foundational reason for formal organization, and easily the most persuasive, is the liability shield. A distinct departure from sole proprietorships and partnerships, organizing as a corporation creates a veil of protection between a business’s members, officers, or directors and the business itself. In the event that the business is sued, only the assets of the business are at stake. That is to say that members’ homes, cars, and personal belongings remain safe. Moreover, debts of the business remain so and creditors’ efforts to collect may extend to only to those assets of the business, not of its members or investors.
In Part 2 of this series, we will detail the most common types of corporations and include some thoughts on how to make the proper entity choice for your business. At bottom, this overview should help demonstrate how sound internal controls combined with external liability protection can deliver confidence in your legal status so that your business may focus on growth. As always, if you are curious how Carolina Craft Legal can help protect and grow your business, drop us an email.
Until next week. Cheers!