Under most circumstances, the experienced Business Lawyers at Revision Legal deem it prudent for clients to operate their businesses through a corporate entity like a standard corporation or a limited liability company. Of course, there are some circumstances where a partnership of some type might be the better option, but it would be a rare circumstance where operating as a sole proprietorship would be better than operating under the framework of a corporate entity.
The key reason for this conclusion is the “shield” that a corporate entity provides to protect the personal assets of the owners from business-related creditors. When created, a distinct legal entity comes into existence with many of the same rights and obligations as a natural person. The rights include the right to enter into contracts, open financial accounts, sue and be sued, buy, sell, and own property, etc. Obligations include paying taxes and obeying laws.
Since a corporate entity is a distinct legal “thing,” it is thereby deemed distinct from its natural-person owners. Thus, when a corporate entity signs a contract, only the corporate entity is liable for the obligations made under the contract. In this manner, the corporate form “shields” the owners of the corporate entity from being held liable for any debt default related to that hypothetical contract. Likewise, if the corporate entity violates a law or regulation and is assessed a civil money penalty, only the corporate entity is liable for the fines; the owners are shielded. There are, of course, cases where the shield can be pierced by judicial action. But, as long as corporate formalities are honored and there are no attempts to defraud creditors, personal assets are protected from business-related obligations.
There are several other reasons to operate your business under a corporate form. One involves what we might call “prestige” or “marketing value.” This is particularly true for new and smaller businesses. Generally, for consumers, it is more impressive that a company is operating as a corporation than as a sole proprietorship. Part of this is simple economics. It costs a certain amount of money to create and maintain a corporation. Thus, a corporate entity can be seen as a sign of success.
Another reason relates to practical things like the ability to obtain a business tax ID number and to obtain a business credit rating. Again, these things can be very important for a new business. Consider the value of a distinct business credit rating if the owner (or owners) have had financial setbacks that have diminished their own personal credit ratings.
A couple of other important reasons for operating your business as a corporate entity involve financing, investors, and the ability to transfer the business (in whole or part). Generally, financiers and investors will require the existence of a corporate entity for any amount of significant funding. This is partly because ownership of a business is much easier to transfer if it is a corporate entity and because the corporate entity has a continuity of existence beyond the lives of its owners. These corporate features are essential for funding and financing decisions.
Contact the Business Attorneys at Revision Legal
For more information, contact the experienced Business Lawyers at Revision Legal. You can contact us through the form on this page or call (855) 473-8474.
