Today, in part two of our three-part blog series, we are going to look at how certain financial and operational risks associated with the nature of your business should be taken into account prior to selecting an entity type. Like most decisions made by entrepreneurs, the financial and operational risks will play into which organizational structure is most appropriate for the business entity.
For example, in a sole proprietorship the business entity is essentially an extension of the individual and is not treated as a separate legal entity. This form, of course, is the simplest form of organizational structure and requires very few formal steps prior to doing business. On the downside however, the owner of a sole proprietorship is personally liable for all of the debts of the business because they are not shielded by the “corporate veil.” Therefore, the investment assets, business assets, and individual assets of the sole proprietor are at risk in this organizational structure. Thus, if the business has a high risk of liability exposure, a sole proprietorship is likely not the most effective organizational structure.
Here, it is clear how both the financial and operational risks associated with the nature of the business might drive an owner to select a different entity, such as a limited liability company or a corporation, that provides that veil of limited liability. If you are a sole proprietor and have considered incorporation, contact our knowledgeable business formation attorneys to discuss how your business’ financial and operational risks may affect your choice of entity in the future.