| Three Things All Entrepreneuers Should Know |
Authored by:
Thomas J. Keuler, Partner
tkeuler@dklaw.com
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So you want to start a business and
achieve that American dream. Be forewarned — that dream can turn into a
nightmare. A business failure can mean the loss
of your home and life savings. And the
probability of failure is very real. According
to The U.S. Census Bureau, the
odds of failure are 50-50. But there are
lines of defense you can use to minimize
your losses.
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Scratching your head over starting a business?
You may want to see a
professional business consultant to help you sort it all out.
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Proprietorship
or corporate entity?
The first step in starting a business is
to choose a structure for your enterprise.
Basically, you have two choices: a proprietorship
or a corporate entity.
Only one
of these structures provides the first and
perhaps best line of defense.
Without question, the proprietorship
is the cheapest and easiest structure to
use. With a proprietorship, you simply
open up shop under a trade name. However,
this choice gives you zero risk protection.
Everything you do will be at
your own personal risk. Worse yet, everything your employees do will also be
at your risk. Just think what one dumb
employee can cost you!
On the other hand, the corporate entity
gives you an invaluable “corporate
shield” that protects you from that dumb
employee, and from the consequences of
countless other risks of running a business.
Yes, the corporate entity will cost
you filing fees and some taxes, and will
require you to submit annual reports
and tax returns. But it’s well worth the
cost and headache in the long run.Once you choose the corporate entity,
you must then determine what type of
entity you want to use: the corporation
or the limited liability company. Each
entity is distinct from the other, and has
its own advantages.
Most people are familiar with the corporation.
It has shareholders (owners), a
board of directors (policy makers) and
officers (executives). The law will allow you to be all of these. To effectively use
this structure, however, you must conduct
your business through the corporation.
If the corporation has full control of
the business, the law will place all of the
risk on the corporation, and not on you.
To set up a corporation, you file articles
of incorporation with the Kentucky
Secretary of State and pay a filing fee of
about $50. The secretary will provide you
a filing form if you don’t have one. Once
the articles are filed, you must hold an
organizational meeting to elect directors and officers and to adopt a set of bylaws
governing how the corporation will operate.
The lesser-known corporate entity is
the limited liability company, or LLC.
It is more simplistic and versatile than
the corporation and has just two components:
members (owners) and manager
(chief executive officer). The law allows
you to be all of these, too. And, as in the case of a corporation, to avoid personal
risk you must make sure that the company
has full control of the business.
To set up a LLC, you file articles of organization
with the Kentucky Secretary
of State and pay a filing fee of $40. The secretary can also provide you a form
for setting up the LLC. Once the articles
are filed, you must set up an operating agreement that will establish the rules
of operating the LLC.
Regardless of their differences, each entity
gives you the same protection against
risk. Unfortunately, there are people out
there who are savvy to this protection
and will seek to get around it by asking
you to guarantee the obligations of the
corporate entity. Once done, you become
personally liable for these obligations.
You should also know that the corporate
shield is not bulletproof. You cannot
use it to avoid liability for injury that you cause to others or to avoid personal
liability for the entity’s failure to pay
certain taxes, such as employee withholdings and sales taxes. The shield also
won’t save you from liability for not providing
your employees workers’ compensation
coverage.
Professional consultant
The second line of defense is the professional
consultant. Professional consultants
include the commercial attorney
and the CPA. These consultants can help
you set up the corporate entity and advise
you how to avoid the numerous legal
and tax potholes that you may bump into
down that road to success. More importantly,
these consultants bring experience.
Remember the adage, “experience is
the best teacher”? These consultants have
seen it all before. Use that experience.
Good ole’ common sense
The last line of defense is the most
obvious: common sense. It is vitally important
that you understand each risk
you take on. If you need money — and
you will — when you sign a bank note and give up a second mortgage on your
home, you should understand that in the
event the business goes bust, you will lose your home and still owe most if not
all of what you owe on the loan. If the
risk is more difficult to appreciate, use
your common sense and go talk with a
consultant.
Tom Keuler has been a partner in
Paducah’s Denton & Keuler law firm for more than 30 years. He represents
many of the firm’s commercial,
industrial and banking clients,
and has been special counsel to
the City of Paducah and counsel to
the Municipal Code Commission in
Frankfort.
Printed in Four Rivers Business Journal (Paducah Sun), May 2008 |
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