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Business Entity Set-Up: The Downside To “Do It Yourself”


The formation of a legitimate business entity offers the business person a number of different forms of protection for personal assets. The two major considerations when forming a business entity are taxes issues and liability issues. Selecting the right form of business entity will both achieve tax efficiencies for the business as well as assist in positioning the business for future growth.


To find the optimum form of business entity that will best suit the business, one must fully understand the complex aspects of sole proprietorship, partnerships, limited liability companies, and corporations, but also one must select a structure that help the owner achieve the business’s specific goals. Each of these entities have advantages and disadvantages regarding the various legal and tax consequences that come into play when operating the new entity.         


There are four broad categories of business entities. The first, a sole proprietorship, offers flexibility to the owner and no formalities to operate. This type of business entity is perfect for a small venture that has no business employees. The major problem with the sole proprietorship is the fact that all the owner’s personal assets are at stake because there is unlimited liability of the owner.


Protection of personal assets and various tax benefits of limited liability company (LLC) make it a popular choice with newly formed businesses. The creation of an operating agreement is also needed with the formation of a LLC.


In a partnership, each partner is liable for the debts of the partnership. There are also limited liability partnerships that include passive partners that are not involved in certain duties and ongoing management. These passive partners are the only ones who are protected from personal liability in a partnership.


There are a wide range of types of corporations that allow for a very flexible structure of business entity. Corporations protect owners from personal liability and generally are viewed as having a legal status independent from the people who compose it.


The only person who may legally set up a business entity is an attorney or the owner of the business. The unauthorized practice of law by others can result in the neglect of important aspects of the decision making process as well as faulty legal contracts that will cause problems down the road for your new business. One should also beware of the internet sites and other quick methods to creating a business entity on your own. This “do it yourself” method can cause your business catastrophic economic problems due to the complexities that are overlooked when choosing an entity. The creation of business entities can involve intricate contracting issues and strict registering, licensing, and permit standards. In some states, entities have “Uniform Codes” that have been created by the states to fill in the gaps of the contracts and other documents that are not explicitly stated. Your business could be controlled by some of these uniform codes and you may not even be aware of it. Also, tax advantages and disadvantages vary among each type of business entity.


Most importantly, different business entities allow for varying protections and risks to the owner. Choosing the wrong entity could make you personally liable for the wrongs of an employee or partner. If the business entity is not set up correctly, could result in you being held personally liable and suffering devastating economic effects. There are ways of organizing your business entity to minimize the extent to which your personal assets are at risk. To ensure the business entity covers all legal bases and has the best chance for success one should consult and experienced attorney.


The Sommer Law Group, P.C., assists clients in selecting the best type of entity formation that will be personalized to meet your business’s specific goals, maximize protection of personal assets, and yield tax benefits. Contact the Sommer Law Group, P.C., , for a free consultation to receive guidance through the complexities involved to protect yourself and your business from faulty and dangerous entity set-ups provided by inexperienced business persons.