The Fundamental Difference Between Incorporating and Starting a Business
Most successful business owners did not start out by thinking “I want to incorporate.” Instead, they thought “I want to start a successful business.”
The advertisements on the radio tell you that you can easily incorporate for a low fee. That is true enough. Anybody can form a corporate entity with the Secretary of State. However, the real key to starting a successful business is determining the right entity to form.
What the advertisements do not tell you is that one size does not fit all. For some businesses, an LLC is optimal. For others, an S Corp. is. And for some, even a C Corp. The devil in starting a successful business is in the details of business planning, knowing state specific legal issues, and understanding the tax considerations for the various legal entities. Some important considerations include:
- Is the business going to have employees?
- Are any of the members or shareholders going to be employees?
- How many initial members or shareholders are involved?
- Do you anticipate adding more members or shareholders in the future?
- Does the business intend to own real property?
- Does the business plan on having more than one location or be part of a parent/subsidiary?
- Is the business going to be a franchise?
- Should the members or shareholders be able to sell or assign their interest and if so, how should it be accomplished?
- How is the business going to be run? What should the voting rights be?
- How will the business allocate profits and losses?
- What happens if one of the members or shareholders quits or dies?
Three other areas that are critical to understand prior to starting a business are:
- Corporate governance. The Ohio Revised Code is chock full of rules that govern the operation of your business and those rules are dictated in large part to what type of entity you choose to form. Further, a good business has good operating documents such as operating agreements and bylaws that clearly establish how the business will operate, how it is managed, and the relationship between the members/shareholders and the business.
- Piercing the Corporate Veil. Many people do not know that the layer of protection a corporate entity provides is not absolute. It can be circumvented by what is generically called “piercing the corporate veil.” It is imperative that business owners understand how and when creditors can disregard the corporate status and attach personal liability to the members/shareholders. Operating your business with these principles in mind will assist you in maintaining the corporate protection so it is there when you need it.
- Dissolution. Sometimes businesses fail. If and when they do, it is equally important to understand the process of dissolution and winding up the business. Again, this process is governed by Ohio Revised Code and is dependent upon what type of entity is dissolving.
All of these questions, and many more, are critical in choosing the correct entity for your business and creating a roadmap for your businesses future success.