Startup, Start Right

At 52businesses, our mission is to pass on the things we learn during our insane journey to you, our followers. So, here are 5 quick legal tips to ensure your startup starts right! 1.     Do not operate as a sole proprietor. Entrepreneurship is the backbone of progress, competition, and financial security in America. Still, most entrepreneurs are unaware of the potential liabilities entrepreneurship carries and the protections that the creation of certain entities can provide. Even if you have doubts about the viability or profitability of your business, you should consider establishing an entity of some kind, such as a limited liability company (LLC). Early establishment of an entity is the best way to protect your personal assets and to keep your business liabilities and your personal liabilities separate. This is why the most popular type of entity created in the United States is an LLC.  You’ll find everything you need to know about creating an LLC in your state in this guide on FindLaw. LLC 2.     LLCs protect your personal assets from the liabilities of your business. Of course, it is legal to operate without an LLC, but it is rarely a good idea. When your business operates as an LLC, your personal assets are protected from the liabilities that arise out of your business dealings. The entity creates a barrier of protection that, if operated properly, shields your personal assets from the liabilities created by your business. The idea is to lose no more than you invested in the business. Imagine that you operate a luxury limousine service with 10 employees. Now, suppose that one of your employees, while transporting a client, collides with a cyclist and paralyzes him for life. As a sole proprietor and owner, you could be held personally liable for all damages the bicyclist, the client, and the employee claim. However, if the limousine service is operated by “Luxury Limousines LLC,” the business–not the owner–would be held liable for the damages. Even if the damages exceed the asset value of the business, the owner would still have no personal liability (with a few rare exceptions). Even if you are just starting your venture, operating that venture as a sole proprietor creates a ton of potential liabilities.

3.     Don’t let your corporate veil get pierced. To distinguish between a sole proprietorship/partnership and an entity, you must examine how the business is run and how the money flows. All business and all contracts must be executed by the company, or by officers of the company, not by the individuals running the company. When it comes to income, owners of the company must be careful not to co-mingle company funds with personal funds. This means that if you get paid by a client, you have to deposit those funds into the company account before you can pay yourself. The methods through which you pay yourself must be described in the company’s operating agreement or bylaws. Failure to make these distinctions may result in a loss of protection, also known as piercing the corporate veil. Essentially, this is a legal tool that claimants can use in court against you to show that your entity was not operating as a real company to begin with.

4.     Observe the corporate formalities. At minimum, the law requires that your business observe the corporate formalities of your jurisdiction. These usually require that your managers/members meet once a year, have an EIN (Employer Identification Number) for tax purposes, and have a business license. To be truly protected by your entity, you should develop other critical company documents, such as operating agreements or bylaws, resolutions, annual meeting minutes, and up to date financial and inventory records. Templates for most of these documents can be found for free online, with document generation services, or with your accountant. However, this is the area where you should spend your money on legal counsel if your budget allows. lawyer 5.      Your operating agreement is important. Invest in a lawyer. The operating agreement is one of the most important documents when forming your LLC. Complying with these rules will either make or break your company in a legal battle. The formation and substance of the operating agreement are critical in protecting yourself from personal liability. Services like LegalZoom allow you to create an LLC with their templates, but even they recommend consulting with an attorney. Keep in mind, boilerplate document generation services do not offer an attorney’s greatest strengths: privilege and customized advice. An attorney that specializes in creating LLCs will be able to give you tailored advice on steps that are essential for your business.

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