Starting a Sonoma County Business – 2
Understanding a Variety of Business Entities
Ed Note: This is the second part of a detailed discussion with Sonoma County Business Lawyer Jim DeMartini which covers the main issues you must consider when starting a new business in Sonoma County. This interview was conducted in April 2016.
When we last spoke we were talking about your potential personal liability for mistakes made in the course of your business or for the debts of the business. When we’re forming organizations to conduct business, we look at avoiding personal liability. The way to do that is to have an entity that would assume the liability, and protect you from personal exposure. As we already discussed, operating as a partnership or as an individual makes you personally liable for damage claims or for business debts. The protection that is typically employed to avoid personal liability is incorporation or creating a limited liability company, an LLC. Corporations and LLC’s provide a lot of benefits that you don’t have if you’re operating by yourself.
It’s quite likely that I’ll have partners down the road. I expect to grow this business and my feeling is that partners will feel ownership in the business and the business will survive and grow better if I give some ownership to others in this endeavor.
Well, then, we can do that by way of a partnership agreement which is historically the way you do that. We can also do that in terms of a corporation or an LLC. Do you envision selling the business at any point or passing it on to anybody else?
My kids aren’t terribly interested in this particular field, so my suspicion would be that I would grow this business to a certain point and eventually sell it, correct.
While you can do that as a sole proprietor certainly and as a partnership, sometimes it makes it easier to sell a business when it’s a corporation because what you’re doing is your selling the shares in the corporation rather than the individual assets, in other words, the corporation would own the assets and you would own the shares of the corporation and the shares are what are sold.
Corporations protect you from personal liabilities as long as you’re paying attention to the rules. The rules are: properly forming a corporation by filing articles of incorporation with the secretary of state, having bylaws, having annual meetings of shareholders and annual meetings of the corporate board of directors. If you follow those rules you will be protected from any obligation you enter into in the name of the corporation. The law assumes that people doing business with a corporation, are looking at the corporation for payment, rather than to you individually.
You would probably form a small closed corporation, meaning that it has fewer than thirty-five members and is intended to be a small group that are not in the business for
investment purposes. The way you can get into trouble with a corporation, especially a small closed corporation is if you don’t pay attention to the rules. You have to have your meetings and capture what happens in those meetings in your minutes. If you don’t, you run the risk of being sued individually under the concept known as “piercing the corporate veil.” That means that if a court deduces that you are not acting as a corporation because you haven’t paid attention to the rules, or it appears that you are just acting on your own behalf, the court can say you are not protected by the corporate shell. The court also can find that the corporation is merely an alter ego of you and that you are personally liable. If we go the corporate route, you really need to remember to pay attention to all the rules… I’ll provide those to you.
Ed: Next week we will publish the third installment of this interview which offers useful advice regarding How To Start A Business in Sonoma County.
Please watch the next educational video in my “Starting a Business” series
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