After learning about owning and operating a business the hard way (several times), Bill Wiseacre has decided that the best way to protect himself and his assets moving forward is to form a limited liability entity. He’s heard of several: partnerships, limited partnerships, limited liability partnerships, limited liability limited partnerships, limited liability companies, “S” corporations, “C” corporations, and close corporations. But with so many options, how does he choose which legal entity to form? Bill takes to the web for research.
Like many entrepreneurs, Bill’s primary concern is two-fold: insulate his personal assets from the liabilities of the company and decrease his tax liability to the greatest extent possible. He spends lots of time online doing research to figure out which entity would best satisfy his needs. When he’s done he heads over to DontHireAnOverpricedLawyer.com where he can file the paperwork to form a limited liability company that would be taxed like an S Corp all by himself for just $19.95! Jackpot.
Bill used the site to fill out and file the requisite paperwork and formed the entity in Delaware. (As he was doing his research it seemed that practically every major business is formed in Delaware.) For the first time in a while, Bill’s proud of himself for having done the appropriate level of due diligence. He’s also happy to be well-insulated from the risks associated with operating his own business. This was a very well thought-out choice!
A few months after Bill formed the legal entity, a client of Uh Oh Enterprises failed to pay. The amount the client failed to pay was a relatively small amount – something easily handled in the District Court. Bill realized it was finally his turn to bring a claim against someone else. He completed the forms and filed the claim with the Court. However, not long after Bill filed the claim with the Court, the non-paying customer filed a motion to dismiss. Why? Uh Oh Enterprises wasn’t qualified to do business in Maryland. Another mistake for Bill.
The Gottlieb Perspective
- There are numerous types of legal entities that can be formed to protect you and your assets. Each have their own sets of pros and cons. Understanding where you want your business to go will enable you to select the right type of entity today so you don’t have to address issues like Bill’s in the future.
- Furthermore, while it may be easy to get some of the formalities right, it’s not easy to know what you don’t know. Bill didn’t know that he had to qualify Uh Oh Enterprises in Maryland to be able to bring a claim against another company in the state. Being able to do so requires filling out a simple form that would have been easy to prepare, but Bill didn’t know what he didn’t know.
What would you have done in Bill’s situation?
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