startup legal FAQ – 6. Why form a company?


Do I really need to form a company or can I do business without one?

With few exceptions, all business should be conducted from within a company that is properly formed and organized as a corporation, a limited liability company (LLC), a limited partnership (LP) or the like. Why? Four basic reasons:

a. Asset Protection. Deservedly or not, almost all businesses get sued. Forming a company around the business can shield personal assets (and other business interests) from being attached to satisfy the company’s liabilities.

b. Asset Creation. Ownership of an informal company such as a sole proprietorship or a “d/b/a” means simply owning the personal assets used in the business. Since most assets depreciate over time, owning them has limited upside potential. Once a company is formed, however, the company itself becomes a separate asset, which can appreciate in value over time.

c. Taxation. A company can be taxed in a number of ways depending on the preferences of its owners. Without a company, all earnings are taxed as personal income.

d. Prediction. If you do not take the time to organize a company before engaging in business activities, the law may dictate that those activities have, in fact, caused a company to be formed for you! Unfortunately, it is quite unlikely to be the kind of company you would prefer.

Forming a company is not just a conservative business practice. It is the first conservative business practice. Without it, none of the others really matter.

Corporate formation. Do it early. Do it often.

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