How to know when to change your business’ DNA

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In nature, all life comes in two forms: plant and animal.

In the marketplace, all business entities are found in two forms: human and non-human.  But unlike plants and animals, a human business can morph into a non-human entity.

The human businesses are sole proprietorships and partnerships. Of the non-human entities, there are three: C Corporation, S Corporation and the Limited Liability Company (LLC).

So why should your human business morph to non-human? There are three excellent reasons:

1.  To acquire certain tax advantages. Talk with your accountant about this.

2.  The “corporate veil” provided by a corporation or LLC can shield personal assets from legal obligations or claims on the business. Talk with your attorney about this.

3.  Many larger customer prospects won’t take your business seriously as a vendor unless you are a corporation or LLC.

When should you morph? If your business is very small, you might be able to spend the incorporating expense—$500 to $1,000—on something more immediately critical, like a computer or marketing. But one concern is that you might wait until it’s too late. Here are three organizational and operating triggers that should help you decide when to morph from a human to a non-human entity.

- When you hire the first employee.

- When you enter into contracts on behalf of the business.

- When you establish any credit, including with vendors.

Non-human entities do require maintenance to be able to sustain the benefits against outside interests. Here are a few critical maintenance tips:

- Tell EVERYONE that your business is formed as a non-human entity.

- Identify the legal ownership designation (like Inc., or LLC) on all documents, signage, etc.

- Operate the legal entity’s finances completely separate from personal activity, especially checking accounts.

- Maintain proper corporate documentation, like shareholder and annual meeting minutes.

Remember that corporate veil? Think of it as you do your roof: Maintaining both will protect you from dangerous things that fall from the sky, like hail and attorneys.

And finally:

-  Don’t forget the triggers.

-  Be proactive, not reactive, about your entity.

-  Keep up the maintenance on your non-human entity.

-  Business entity laws vary by state.

Write this on a rock ...

Your business is not a plant; you can change its DNA.

___________________________________________

 

Jim Blasingame is one of the world's leading experts on small business and entrepreneurship. He is the creator and award-winning host of the nationally syndicated radio program, The Small Business Advocate® Show.  In addition to his weekly columns, Jim is the author Small Business is like a Bunch of BananasThree Minutes to Success, and his latest release, The Age of the Customer: Prepare for the Moment of Relevance.




The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Personal Finance , Small Business

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