The Company You Keep

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 the owners’ personal assets (and other business interests) from being attached to satisfy the company‚Äôs liabilities.

b. Asset Creation. A “d/b/a” does not a company make. If you’re doing business without a company, you’ve got an undifferentiated line of business that is difficult to quantify or encapsulate as a meaningful thing. Ownership of an informal company such as this means simply personally owning the personal assets used in the business. Since most assets depreciate over time, owning them has limited upside potential. And since you don’t really have everything tied up in a nice package, you don’t really have anything to sell to investors or acquirers. Once a company is formed, however, the company itself becomes a separate asset, which can appreciate in value over time and all or part of which can be sold to investors and acquirers.

c. Taxation. A company can be taxed in a number of flexible 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. Get these things in order so you know what to expect and can command the results.

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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