Your Business Can Change Its DNA
In nature, all life can be reduced to two forms: plant and animal. In the marketplace, all business entities can be reduced to two form: human and non-human.
The human entities are sole proprietorships and partnerships. The non-human ones are legally formed, like corporations and limited liability companies (LLC).
The distinction is important for three primary reasons: legal issues, like contracts and lawsuits, perpetuity issues, and tax filing and tax paying.
In nature, a plant can't change its DNA and turn into an animal. But a sole proprietorship can morph into a non-human business entity, separate from its human shareholders.
Here are two benefits of forming a non-human entity:
1. A legal entity is formed which can enter into contracts, pay taxes, be sold or inherited.
2. A "corporate veil" is established, which is a legal term for liability protection for the personal assets of corporate stockholders or LLC members.
When should you morph?
If your business isn't one of the non-human forms, should it be? If it's very small, you might be able to spend that $500-$1,000 expense on something more immediately critical, like a computer or marketing. But one concern is that you might wait until it's too late.
So how do you know when to morph? With organization and operating triggers like any one of these examples:
- When you hire your first employee.
- When you enter into contracts on behalf of the business.
- When you establish any credit, including with vendors.
Maintenance required
Non-human entities do require maintenance. Here are a few critical maintenance tips:
- Tell EVERYONE that your business is formed as a non-human entity.
- Identify the legal ownership designation (like Inc.) on all documents and signage.
- Operate the legal entity with its checking accounts.
- Maintain proper documentation, like shareholder and director meeting minutes.
If you fail to perform proper maintenance, you are at risk of having your corporate veil "pierced." This is another legal term for when someone with a claim against the company tries to go through the non-human owner to get to personal assets of shareholders.
Think of your corporate veil as you do your roof: Maintaining both will protect you from dangerous things that fall from the sky, like hail and attorneys.
The Big Three
There are three primary non-human entities: C corporation; S corporation; and the LLC or the limited liability partnership. Talk with your attorney and CPA about which ownership form is right for you. And finally:
- Don't forget the triggers.
- Be intentional, not accidental, about your entity.
- Keep up the maintenance on your non-human entity.
- Ownership entity laws vary by state.
Write this on a rock... Your business is not a plant; you can change its DNA.
Jim Blasingame
Small Business Expert and host of The Small Business Advocate Show
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