Starting a new business venture can be a rewarding and exciting experience. In fact, each of the Fortune 500 companies started out with an idea that someone came up with and that idea was properly executed and taken to the public.
And, if you look at the success of each of these businesses, you will find that it required the owner to invest a lot of time and a lot of hard work. It also required careful planning, discipline and the knowledge of at least one person inside the business, who was able to keep an eye out for potential problems and know who to ask for help in solving those problems or knowing how to solve the problem, as the business goes through its transitions and growth periods. In fact, in order to overcome the many obstacles that will result during the initial start-up of the business and which will occur during the growth of the business, a successful business owner will have at a minimum, a qualified business attorney and a qualified CPA upon whom they can rely for assistance and so that they can ask the appropriate questions and get the help they need in order to grow the business as issues arise along the way.
In fact, often a contributing factor to the failure of new and existing businesses, is when the business owner tries to form the new business on their own ortries to make complex legal or financial decisions without using the assistance of qualified professionals,or wherethey use only a CPA in forming the company and in giving them advice that should really be left for a qualified business formation attorney or business lawyer. Next, contributing to the failure of a business is where the owner only focuses on the business at hand, and not in the formation of the business or the policies and procedures that need to be put in place in order to allow the business to grow. Without the proper formation and policies put in place, and without overcoming the many legal and financial obstacles that will occur along the way, and without having the expertise available to overcome these obstacles and legal questions, how can the business succeed, let alone grow? It simply cannot.
Pitfalls of Initial Business Formation
The most common business formation is usually where a sole owner decides on an idea and then starts up the business onhis/her own (for example an electrician or a carpenter). In starting this type of business, most think of creating a “sole proprietorship” and they may even be advised to start a “sole proprietorship” business. However, this type of business structure is the least secure formation of any type of business and, although the cheapest way to form a business, it is often fraught with long-term problems. In some cases these problems will show up initially and in other cases the problems will appear when the business starts to grow. In my personal opinion, as a business lawyer, I would not recommend using a “sole proprietorship” as an initial business formation.
Increased Personal Liability Within the Sole-Proprietor Business
“Sole proprietor” business structures place the legal and personal responsibility squarely on the shoulders of the business owner. There simply is no protection. Under this type of business structure, the owner is responsible for 100 percent of the business expenses and the liability in the event of any loss or judgment against the business. In fact, any and all non-exempt personal or real property owned by the business owner, including homes, vehicles, and other types of personal property, could be attached and liquidated in order to cover the loss from the business or any liability on the part of the business. Furthermore, all tax liabilities pass directly to the business owner and the business owner must report his or her income and pay the tax on an individual tax return, rather than being expensed off as a business expense on a business return as is done in other types of business formations.
Difficulty in Raising Additional Capital if the Business is Set up as a Sole-Proprietorship
Sole proprietorships are not able to sell shares of the company or add additional owners and therefore this type of business structure is limited in its ability in raising additional capital through traditional business methods. And, banks do not like loaning money to sole proprietorship entities. And, in the event that a line-of-credit or a loan is not available, the company may fail as it will not be able to survive or meet financial obligations.
Limited Growth Potential of a Sole-Proprietorship
If you seek to start up a business as a sole owner of your company, you are probably very skilled in your particular field of work and you are probably not a business lawyer, an accountant or a logistics or information technology expert. And while these other professional interests may seem distant to you now, when setting up a business they soon become a very intimate part of your new business venture. If you plan on succeeding in your business you will quickly discover that issues will come up, and, if you do not have the correct legal support, accounting support or logistics and technology support to grow the business, the business will soon fail. And, not having the proper outside support will make or break your company. There are only so many tasks that a single individual can accomplish within a sole-proprietor business and without assistance of and setting up the business properly, you WILL limit the resources that you have. Setting up your business as a sole-proprietor business will prove to limit the overall growth of your company in the long run.
When looking at an ideal business structure for your company, especially if there is initially one owner, a qualified business attorney can properly answer your questions and ask you the proper questions so that they can assist you in setting up the proper legal form of business that will ensure your protection, protect your interests and will allow your business to grow all the while saving you time, expense and unlimited frustration.
If you have any questions pertaining to the structure or formation of a new business, restructuring of a current business, or if you are seeking a qualified business attorney, please contact Goldstein & Scopellite, PC. Our expert team of business lawyers is well versed in all aspects of business law and we are available to assist you in structuring your business or organization and in being corporate of business counsel. Our offices are located in the Dallas-Fort Worth, Texas area and in Tucson, Ariz.
Goldstein & Scopellite, PC, is located in Dallas, Texas and was established in 2002. For more information, see our local listing in D Magazine.
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