Two Big Risks of Not Choosing a Business Entity

While we all would love to start a business and immediately start making money, there are a few legal items to address before you begin working with your first customer. Though not necessarily required, selecting an entity structure for your new business is a strongly recommended initial step. We’ve published several blogs in the past about the benefits of forming as an S-Corp or LLC, but this month we’re talking about what may happen if you forgo this step in the business formation process.

For starters, when you form a business, you’re automatically considered a sole proprietor. You’ll use your personal social security number and your legal name to conduct business. And while you are certainly within your legal rights to do this, it isn’t exactly the norm and could actually harm your credibility with other businesses that you may want to work with. Additionally, you could face one, or both, of these huge risks.

  1. You Become Personally Liable for Everything

As a sole proprietor, you and the assets you own are on the hook in the event someone sues your business. That means if a disgruntled customer or business sues you for $1 million dollars and you don’t have the money, you could lose your house, your car, and anything else to pay off the debt.

Even if someone brings a claim against you in a small claims court, the optics of you having never formed a legal business entity doesn’t look good and can work against you in your case.

  1. You Could Struggle to Receive Funding

Whether you’re looking to obtain capital from individual investors or from a bank, operating as a sole proprietor could make it difficult to obtain the necessary funds to keep your business afloat. Banks are much more reluctant to fund a business that isn’t operating as an LLC, C-Corp, or S-Corp.

In the end, operating as a sole proprietorship may still be the best option for your situation. However, we recommend speaking with an experienced business lawyer and exploring your other options, including the formation of an LLC. Along with having your personal assets protected under a registered entity, you’ll also have access to business banking accounts and an easier time receiving funding.

If you would like to talk more about forming an LLC, S-Corp, or C-Corp for your business, contact us today.

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