Starting a business is one of the biggest decisions you can make for your career. It can affect your career, your family, and your future. It is no secret that 30% of businesses fail in the first two years, and nearly 50% fail in the first five years. Many times, it is the decisions you make in the beginning that can put you on the course to succeed or fail.
Many people become business owners with a desire of freedom, being their own boss, and becoming wealthy and changing the lives of their family. Whatever your reason may be for, starting your business right is an important first step.
Where to Start
When you start a business, there may be an incentive to get the business off the ground and worry about the other items later once you get new customers, clients, and business. However, there are many reasons why this can be the worst decision you can make so early in your business’s life.
Formally Organizing your Business
First, you need to formally organize your business, whether that is as a Limited Liability Company(LLC) or as a Corporation. If you jump into business without formally organizing your business, you can be held personally liable for any debts or omissions that occur in the name of your business. If you have a business partner or partners, this is even more important.
Why It’s Important
What if you do not establish an LLC or a corporation and you just start doing business? What is the worst thing that can happen? In Ohio, this means if you are signing any contracts or leases you are signing them in your own individual capacity. If these contracts or leases go bad and you get sued, you are getting sued personally. If there is a judgment, then the judgment will be against you, personally. If the judgment is large enough, you could find your personal assets (such as your home bank accounts, and retirement accounts) at risk of loss.
The biggest reason is because of a legal concept known as “piercing the corporate veil.” This is a legal term that judges and courts use when a case is decided in which the court seeks to hold the individual members and shareholders of the LLC or corporation personally liable for the judgment from the court.
If you started your business without formally organizing your business, it is likely that you opened bank accounts, signed contracts, and signed leases prior to being organized. This could be used as an argument in an Ohio court by a Plaintiff’s attorney on why you should be held personally liable.
Formally organizing your business in Ohio is just the first step. You also need to be engaged in active corporate governance, which includes holding annual minutes to maintain your limited liability and ensure that the corporate veil is never pierced if your business is sued. I will be discussing these business and corporate law issues in future articles, so make sure you check back in or sign up to receive regular business and corporate law legal updates.
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If you have questions about starting a business, or you have already started a business and you have legal questions about your business after reading this article, please contact our office for a conversation so that we can discuss your business law needs.
We look forward to hearing from you.