By: J. Cale Rogers
Coleman, Chambers, Rogers & Williams, LLP
This article is intended for educational purposes only and is not intended, nor should it be construed to provide legal advice.
"Do I really need to incorporate?" you may have recently asked yourself. If you are operating your business without the protection of a corporate shell, you may be putting your personal assets within the reach of the creditors of your business. Someone who operates their business in his or her name without legally forming an entity to operate the business is defined as a sole proprietorship. The owner of a sole proprietorship is responsible for the debts of business. If you have not incorporated or organized your business by filing with the Georgia Secretary of State, your personal assets, including your home, could be used to satisfy any judgment against your business. However, filing and following the legal formalities of properly operating your company is the best insurance to protect your personal assets from the claims of business creditors.
The first steps you take as a business owner are among the most important that you will make. Most successful business owners have the foresight to get professional assistance related to the formation and operation of their business. Once you have decided to incorporate, one of the first discussions you will have with your professional advisor relates to the type of entity best suited for your business. The two most common types of entities are the Limited Liability Company (LLC) and the Sub-Chapter S Corporation. Each has different advantages and disadvantages. Choosing the appropriate business entity could allow you to receive more favorable tax treatment than you currently receive. While an LLC provides its owners with flexibility and fewer corporate formalities, as well as certain tax advantages for companies that own real estate, certain distributions to shareholders in a Sub-Chapter S Corporation are exempt from self-employment tax.
If you are considering incorporating your business without the assistance of an attorney, you should know that a qualified attorney does much more than just file the paperwork necessary to bring a company into existence. Perhaps the most important task of an attorney in the process of incorporation is not the creation of the entity, but rather providing the client with carefully drafted documents defining the rights and obligations of the owners of the company to one another and to the company. Provisions of the Operating Agreement (the document defining the rights of the owners of a Limited Liability Company) or the Shareholders' Agreement (the document defining the obligations of the shareholders of a Corporation) related to the death of an owner or the withdrawal of an owner are among the most important provisions that should be defined at the time the company is created. Detailed, clearly-defined provisions in Operating Agreements and Shareholders' Agreements related to these matters can sometimes avoid future disputes among business partners. How capital contributions are treated in the event of the dissolution of the business and whether, and under what circumstances, an owner of the company can transfer his interest in the company are also provisions that must be carefully considered and addressed in the company's initial formation documents. The assistance of someone with legal experience in the corporate arena can assist the initial owners of the company by providing an explanation of the various options that are available in these situations and craft provisions addressing these issues that will provide guidance in the event of one or more of these scenarios.
If you have legally incorporated or organized your business, you should ask yourself whether you have been observing the corporate formalities necessary to deter claims by business creditors that the corporate shell should be disregarded and that your assets should be subject to the claims of business creditors. At a minimum, you should ensure that annual corporate meetings are being held and that minutes of the same are being transcribed and kept in the company's books, that the corporate checking account is used for legitimate corporate purposes and expenses and not for personal expenses, you should ensure that your advertising (your invoices, phone book ads, business cards, etc.) represents that your company has in fact been incorporated or organized, and that all contracts are entered into in the name of your company. If sued, you can certainly expect an attorney to probe your corporate records to determine whether you have observed certain corporate formalities. If you have not, there is a theory in Georgia law that could allow a creditor to "pierce the corporate veil" in an attempt to subject your personal assets to claims of business creditors.
Buying or selling a business? The first step in protecting yourself with respect to the transfer of a business is to ensure that a contract has been prepared that protects your interests prior to the closing of the transaction. A qualified business attorney can be invaluable in the process of purchasing or selling a business. The fundamental question with respect to the purchase or sale of any business is whether the transfer is what is commonly defined as an "asset purchase" (where the purchaser is buying only the assets of the company or the interests of an LLC, and not its liabilities) or a "stock purchase" (where the purchaser of the business is buying the stock of the company, as well as all of the company's liabilities). There are certain tax consequences or benefits that are contingent upon on whether the transaction is structured as an asset purchase or a stock purchase, and the way certain assets are classified within the contract for the purchase and sale of the relevant business will also affect the purchaser's and seller's future tax consequences. The assistance of an attorney familiar with the transfer of business interests is essential in negotiating a contract that will protect your interests with respect to the business both prior to and subsequent to closing.
At Coleman, Chambers, Rogers & Williams, LLP, we have attorneys that are familiar with and assist clients with a wide variety of business and corporate issues, from forming new corporations, to drafting and negotiating contracts, to assisting with the purchase or sale of businesses, to representing clients in business disputes, to general business representation. We welcome you to schedule an appointment with one of our business attorneys to discuss any of your corporate needs.
Please be advised that the purpose of this writing is not to provide legal advice, but is instead intended to provide a generic overview of certain issues that arise with some frequency in the area of business formation and incorporation. Please do not apply any of the information contained in this brief overview to your particular factual situation without seeking the consultation of an attorney who can review your specific situation and provide accurate and knowledgeable advice related to the same. For those interested in speaking with an attorney, Coleman, Chambers, Rogers & Williams, LLP offers free initial consultations.
About the author: Cale Rogers is a partner and attorney with Coleman, Chambers, Rogers & Williams, LLP, in Gainesville, Georgia. The law firm of Coleman, Chambers, Rogers & Williams, LLP regularly handles matters regarding corporations, formation, LLC, LLP, Inc., business law and business litigation. The firm has handled or can handle business law and corporate matters in numerous counties including: Hall County (Gainesville), White County (Cleveland), Lumpkin County (Dahlonega), Gwinnett County (Lawrenceville), Dawson County (Dawsonville), Habersham County (Demorest, Cornelia), all of Northeast Georgia, and throughout the State of Georgia.