Written by Jared Koch
When entrepreneurs start a new business, money is tight. Precious funds need to be spent on technology, designing logos and websites, insurance, marketing, and much more. With little cash to spare, new business owners often put off discussions with a lawyer about how to protect their new company.
That’s when things can go wrong. For example, maybe Sarah and Brittany thought they had the time to invest in a new daycare, but now Brittany wants out. Without entity documents in place, there are no clear rules about whether Sarah can (or has to) buy out Brittany and at what price.
Or perhaps Ashley put in a lot of capital for a restaurant and Michael runs the day-to-day operations, but Ashley is upset about some decisions that Michael is making. Without an operating agreement, it might not be clear who has to sign off on which decisions and lead to further problems down the road.
Or imagine that Jacob invented a great new workout app but some of its users got injured while exercising and now they are suing Jacob. If Jacob doesn’t have a business entity and his insurance won’t pay enough to cover the lawsuit, Jacob could be held personally responsible to pay damages to his customers.
All of these headaches can be avoided with a few conversations with an attorney. Proactive legal planning is relatively inexpensive and can protect business owners when problems arise in a startup or small business.
The most popular way to achieve this is through a limited liability company (an “LLC”). An LLC has many advantages for a business. The first is the most important—an LLC protects the business owners from personal responsibility for business debts and other liabilities. This means that if the LLC is struggling financially or an accident leads to a lawsuit against the company, the owners’ homes, retirement funds, and other assets are not at risk. Entrepreneurs don’t get any of these protections when they operate a business without a formal business structure like an LLC or corporation.
LLCs are also simple to maintain. They allow business owners to take advantage of “pass through” taxation, so they are taxed in the same way as without an entity in place. LLCs also don’t require much formality to maintain and are very flexible in how the business can be structured. After an LLC is formed in Minnesota, maintaining the LLC is free and only requires a single renewal filing every year.
In addition, at some point in businesses with multiple owners, one owner is going to want to leave the business. Whether that is because the business is doing poorly or extremely well, the LLC structure lays out the path to buy out a co-owner in advance so that someone leaving the business doesn’t lead to costly legal battles.
Having an LLC or other entity in place can also signal to investors that you are serious about the new business. Having an LLC or corporation structure already established shows that you believe in this business and are taking steps to get up and running. This may convince potential investors that this is more than just a hobby that you are interested in but rather that you truly want to make this business a success and are willing to do the work to get there.
All-in-all, legal planning is much more important than you might think when operating a startup or small business. When it’s time to start your next business, don’t wait until it’s too late to create a business entity. An LLC or another type of entity might be the right fit to protect you and your company. Contact Blethen Berens at 507-345-1166 to schedule a consultation.