Tag Archive for 'small business legal structure'

How to know when to change your business’ 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 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.

When should you morph? 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.

Remember that corporate veil? Think of it as you do your roof: Maintaining both will protect you from dangerous things that fall from the sky, like hail and attorneys.

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.

Write this on a rock … Your business is not a plant; you can change its DNA.

The small business ownership transfer challenge

One of the primary reasons most small businesses aren’t prospects for venture capital is because of incompatible thinking regarding the exit strategy. VCs expect to get their money back within a few years (less than 10 but closer to five) while a business founder typically thinks of running the business until he or she gets tired of it and/or retires.

Regardless of exit strategy goals, all business owners must think about how they’re going to exit the business they founded: selling to a new owner, going public, handing the reins to family members, or as in way too many cases, simply going out of business. But sadly, as much of a certainty as it is that a founder will exit the business, most fail to plan for this inevitability.  And the result of this failure to plan an exit often results in an expensive and painful scenario for the owner, and in the case of health problems or death, the family.

But all of this inefficiency, pain and brain damage can be prevented with a strong resistance to floating down that river called denial, plus some forethought and planning.  If you’re having trouble making this happen, your problem can be fixed by talking to professionals who know how to hold your hand and get you on the right ownership transition track, regardless of which exit scenario is most likely to be in your future.

Once you’ve come to grips with your ultimate departure from the business, you can start to accept that the way your business is operated and structured when you show up each day - let’s say, in the middle of your ownership tenure - will be different from the way it will look on the day you convey the business to the next holder of the keys, whether an arms-length sale or a family transaction.

Recently, on my small business radio program, The Small Business Advocate Show, I talked about the process of planning for the orderly and successful transfer of ownership of a small business with a member of my Brain Trust, Dr. David Gage. David is a leader in the field of business mediation, a founder of BMC Associates and author of Partnership Charter: How to Start Out Right with Your New Business Partnership (or Fix the One You’re In).

Take a few minutes to listen to this conversation and be sure to leave your own thoughts, including any business transfer stories you might have. Listen Live! Download, Too!




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