What's the Point of Legally Organizing a Business?
Of all the things that drive business lawyers crazy about startup enterprises, a freewheeling attitude toward licensing, registrations, and permits is one that sticks out. While it's understandable why folks operate as sole proprietors in the early days of a business, they should get licensed once the concept they're pursuing has proven to be profitable. Take a look at what the point of licensing and registering your business is.
Getting Legal
In the United States, there is a relatively lax attitude toward sole properties and startup businesses. Generally, the federal government and even most state governments aren't too concerned about such enterprises as long as they're paying taxes.
Three major exceptions exist. First, some localities tend to be prickly about business being conducted in certain areas. For example, buying a food truck and just parking it anywhere without getting a permit and having a license from the city is a formula for receiving fines and having your vehicle and equipment impounded.
Secondly, certain trades are highly regulated, especially ones where people work with tools or chemicals that could harm customers. For example, the work of cosmetologists is often tightly regulated.
Finally, professional trades where people can damage property, especially public property or utilities, are frequently strictly licensed. Most things you think of as a trade, such as plumbing, electrical work, construction, and remodeling, require both a professional and a business license.
Taxes
How your business is structured will determine how it is taxed. Money from a sole property is seen as personal income, and the only deductions you can take are the ones available for small office and employment purposes. Likewise, legally organizing your business may reduce your exposure to audit, especially if you move from cash accounting to accrual.
Liability
One of the main reasons companies retain the services of business lawyers is to reduce their liability risks. Running an unincorporated business leaves your personal assets and wealth exposed to legal liability. Operating as an LLC creates a partition between the assets of the business and those that you own. Why does that matter?
Suppose someone successfully sues your business. The absolute radical extreme of compensating them is that they seize all the assets and the business goes under. If you're operating in a completely unincorporated fashion, though, the claimant gets to keep taking personal assets—meaning your house, your car, and certain retirement accounts—until they're fully compensated.
For more information and to avoid complications with organizing your business, contact business lawyers.
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