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Liability central issue in choice of business entity

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A new business faces a number of challenges. Financing, pricing, services or products to offer, and location of the business may be among the issues for a business owner to consider. Another concern is how to limit the liability of the owner's personal assets from the debts and obligations of the venture. Several new options exist for the formation of an entity.

The sole proprietorship is without question the most popular form of business. There are no documents to file to establish one and no agreement is required. If the name of the business is something different from the name of the owner, the fictitious name should be registered with the Secretary of State's Office.

While the sole proprietorship has the advantage of being simple, it offers no protection against the creditors of the business. All business debts are collectible against the sole proprietor. If the business is one with extremely low exposure, this form of business may be satisfactory provided you secure adequate insurance.

The general partnership, so popular in the past because it avoided the formalities of an incorporated entity, is also simple to set up. A partnership agreement is drafted to delineate the operation of the business, but all the partners are fully liable for the debts and obligations of the partnership. Because the partnership provides no protection for personal assets, it is unsuitable for many enterprises.

The corporation has been the traditional favorite entity for business owners desiring to shield themselves from liability for corporate indebtedness. To form a corporation, articles of incorporation are filed with the secretary of state. Stock is then issued to shareholders, and minutes are taken at annual and special corporate meetings.

The state also requires corporations to file an annual report. Failure to file will eventually cause the corporation to be administratively dissolved. While the shareholders' personal assets are generally protected from creditors, the entity requires some maintenance.

The current favorite entity for new businesses is the limited liability company. The owners, called members, are taxed in the manner of a partnership, while still receiving the liability shield formerly reserved for corporate shareholders. Because the limited liability company is extremely flexible and has few formal requirements, it has become the entity of choice.

A new business should also seek the advice of professionals in the fields of law, accounting and insurance. Many problems can be avoided by seeking and following those with expertise in areas with which you may be unfamiliar.

Professional advisers may assist you in reviewing leases, setting up the books for your business and ensuring that an accidental occurrence will not threaten the financial viability of the enterprise.

If you will have co-owners in the new business, you should consider a buy-sell agreement. A buy-sell agreement states the terms on which and persons to whom a business interest may be transferred during life or upon death.

Without such an agreement, a business interest could be transferred to a spouse, child, other relative or friend of the deceased business owner. A buy-sell often gives co-owners a right of first refusal to purchase the transferring owner's interest before it may be sold, gifted or otherwise transferred to an outside party.

Finally, it is helpful to develop a strategy for disposing of your business to avoid a fire-sale of assets at an inopportune time. An appropriate estate plan will further assist your heirs in making a smooth transition. The efforts you make to structure your business properly from the outset will be beneficial to you and the company in the years to come.

(Stephen F. Aton is a Springfield attorney practicing in the areas of corporate law and taxation, and estate planning.)

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