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Legal Concerns When Choosing a Business Entity

Business Entity.jpgWhen an individual or a group of people are considering starting a business, one of the most important issues to address is the type of business entity that will be utilized. Businesses entities are created by state law and include the following types of entities:

  • Sole proprietorships;
  • Partnerships;
  • Limited liability companies;
  • C-Corporations; and
  • S-Corporations.

The business formation that will be most appropriate for a particular venture depends on a number of issues, and the choice of entity should always be carefully considered. For this reason, anyone considering starting a business should always fully discuss their situation with an attorney familiar with the various business entities available and the potential effects of choosing one entity over another.

Ease of Formation

In some cases, the ease of formation is a factor in determining what type of entity to use. For example, if the proposed business has little risk of incurring liability or the people involved do not wish to devote a significant amount of time to filing paperwork with the Secretary of State, a sole proprietorship or partnership may be appropriate as these business formations can be formed with minimal formalities.

Personal Liability

One of the most common motivations for people who are starting a business to choose a particular business entity is to shield themselves from personal liability for any debts incurred by the business. In a sole proprietorship or partnership, the members of the company can usually be held personally liable for any business debts that are incurred, meaning that personal assets may be at risk if the business is sued or if it is unable to pay its bills. When a business is organized as a limited liability company or corporation, the owners and officers of the company generally cannot be held liable for business debts. Additionally, certain types of partnerships can also provide partners with limited liability.

Concerns Associated with Growth and Financing

Another two issues that are of significant concern to many business owners are the opportunities for growth and obtaining outside financing. For example, businesses that wish to "go public" should likely incorporate as corporations are the only type of business entity that are able to issue securities in order to raise capital. In addition, corporations generally provide more room for growth and have a more formalized governance structure than other business entities. On the other hand, the formalities associated with forming and operating a corporation often involve significant barriers to entry for smaller operations and may stifle growth for smaller companies.

Contact a San Jose Business Attorney Today to Schedule a Free Consultation

When starting a business, your choice of business entity can have a significant impact the overall success of and growth potential of your enterprise. For this reason, anyone considering starting any type of business should be certain to their options with an experienced lawyer. To schedule a consultation with one of the San Jose business attorneys of Diemer, Whitman & Cardosi, LLP, reach out to us today online.



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