Should your business change its DNA?

In nature, all life comes in two forms - plant and animal.

In the marketplace, all business entities are found in two forms - human and non-human. But unlike plants and animals, a human business can morph into a non-human entity.

The human businesses are sole proprietorships and partnerships. Of the non-human entities, there are three: C Corporation, S Corporation and the Limited Liability Company (LLC).

So why should your human business morph from human to non-human? There are three excellent reasons:

  1. To acquire certain tax advantages. Talk with your accountant about this.
  2. The “corporate veil” provided by a corporation or LLC can shield personal assets from legal obligations or claims on the business. Talk with your attorney about this.
  3. Many larger customer prospects won’t take your business seriously as a vendor unless you are a corporation or LLC.

If your business is very small, you might be able to spend the incorporating expense - $500 to $1,000 - on something more immediately critical, like a computer or marketing. But one concern is that you might wait until it’s too late. Here are three organizational and operating triggers that should help you decide when to morph from a human to a non-human entity.

  • When you hire the first employee.
  • When you enter into contracts on behalf of the business.
  • When you establish any credit, including with vendors.

Non-human entities do require maintenance to be able to sustain the benefits against outside interests. 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., or LLC) on all documents, signage, etc.
  • Operate the legal entity’s finances completely separate from personal activity, especially checking accounts.
  • Maintain proper corporate documentation, like shareholder and annual meeting minutes.

And finally:

  • Don’t forget the triggers.
  • Be proactive, not reactive, about your entity.
  • Keep up the maintenance on your non-human entity.
  • Business entity laws vary by state.

Your business is not a plant; you can change its DNA.

Recently on The Small Business Advocate Show, I talked more about the legal structure of small businesses. Take a few minutes to click here and listen. As always, tell us your experiences in changing the legal structure of your small business.

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