Why New Businesses Need Legal Help
With Detroit’s arts and creative industry booming, there are a lot of new business startups in southeast Michigan. While the owners of these entities may not be aware, solid legal advice from the beginning is imperative to protect their assets and achieve their business goals.
Initially, perhaps the most important decision for a business is what type of entity it should operate as. There are three basic considerations when determining the type of entity to form:
- Insulation from liability;
- Tax treatment; and
- Flexibility to raise capital for the company.
Businesses are usually operated as sole proprietorships when formed, which is a flexible type of entity but does not provide the owner with any insulation from the liabilities of the business. In other words, if the business incurs a debt or adverse judgment, the owner’s own personal assets (house, savings, boat, etc.) are in jeopardy.
In order to insulate owners from this potential personal liability, various types of entities are available. These include limited partnerships, C-Corporations, S-Corporations, and Limited Liability Companies (LLCs). The type of entity is chosen after careful consideration of the business type and the three basic factors outlined above. For example, a C-Corporation provides the most methods for raising capital, but it is subject to “double taxation.” Other entities enjoy the limited liability of C-Corporations but have “flow-through” tax status.
LLCs are a hybrid of partnerships and corporations. They enjoy flow-through status for tax purposes and the owners are not personally liable for the debts of the company. LLCs are one of the most common types of non-public entities.
Another important legal aspect to consider is the preparation of non-disclosure agreements and employment agreements specifically tailored to meet the protection needs of each specific business enterprise. A professional and well-drafted business plan should also be created and updated regularly.