Incorporating a New Business

Should You Incorporate Your New Business?

Many new businesses should not incorporate or form an LLC until the business becomes profitable because the troubles outweigh the benefits.

Many new businesses should not incorporate or form an LLC until they become profitable because the troubles outweigh the benefits.

For many new businesses the best initial ownership structure is either a sole proprietorship or if more than one owner is involved a partnership. A sole proprietorship is a one person business that is not registered with the State.

If you don’t have employees, don’t plan on seeking investments or funding, don’t have a business that creates great legal exposure, and don’t have a lot of income you may not need to form a corporation or LLC. A corporation or LLC can be expensive to maintain. Corporate books and records must be kept, minimum state taxes must be paid (presently $800) and an annual tax return must be prepared and filed, even if there is a loss. Once your becomes lucrative it may make sense to create an LLC or corporation.

You will need a business license from the City in which you operate. And you should file a fictitious business name statement with your county recorder (also known as a “dba’) if your business will have a name other than that of the owners.

You should speak with an accountant and an insurance broker. Make sure you set up an appropriate book keeping system with a separate business account. Make sure you obtain insurance if necessary. For example you might need premises liability insurance.

A potential draw back of the sole proprietorship is that it is inseparable from its owner. This means that the owner of the business reports business income and losses on his or her personal tax return and is personally liable for any business related obligations such as debts or court judgments.

A key purpose of corporations, LLCs and other business entities is to provide protection from personal liability for business debts. It is also important that the entity has a writing which memorializes the rights and the obligations of the individuals who are shareholders or members. But remember for you to obtain credit for your business you will have to personally guarantee the obligation–whether a credit card or bank loan–no lender will be willing to look only to a newly formed LLC for payment. So, unless the business has an unusually high risk for lawsuits insurance should suffice instead of corporation or LLC.

If there is more than one owner of the business, you must plan for what happens if one of the owners desires to leave or must leave the business and you should plan for what happens if one of the owners gets a divorce.  The way to accomplish this is through a buy-sell agreement.  A buy-sell agreement is more important to a start up than incorporation in almost every instance, and yet most of my clients who have going concerns, that is operating businesses, have no buy-sell agreement in place.  A buy-sell agreement may be thought of as a prenuptial agreement between business partners/shareholders.

Beverly Hills Business Attorney Galen Gentry can help you create your business start up, draft employee contracts, buy-sell agreements, and incorporate your business. With 25 years of experience and the highest rating for legal skills and ethical conduct from avvo.com and martindale.com Galen can work with you to avoid costly legal problems through proper planning. Call for a free, no obligation consultation. Serving clients in Southern California including Los Angeles, Beverly Hills, Santa Monica, Hollywood, The San Fernando Valley, Ventura County, Orange County and Long Beach.