Why Form a Business Entity?
One of the basic questions I am asked is why, and when, a client should form a business entity to conduct his or her business. I am asked this particularly by clients with smaller businesses who do not want to incur the costs of forming a corporation or a limited liability company. The short answer is, forming an entity is almost always a good idea, and can be viewed as a relatively inexpensive form of insurance. For the cost of forming a corporation in New York (at this moment, $125) the owners of the corporation (its shareholders) can shield their personal assets from the corporation’s obligations. This is not to say such protection is fool proof. For instance, even if not legally liable for a corporation’s obligations its shareholders can still be sued (and the costs of defending a law suit can be steep), and there are situations in which an individual shareholder can still face liability with respect to a corporation’s business. For instance, if the shareholder is negligent in acting on behalf of the corporation, the shareholder can still be liable for his or her personal negligence. Further, the principals must make certain the corporation acts as a corporation, by for instance holding regular board meetings and not mingling corporate and personal assets. Absent observing such formalities creditors of the corporation can “pierce the corporate veil” and obtain judgments against a corporation’s shareholders’ for the corporation’s obligations.
Caveats aside however, forming an entity is almost always a wise move when starting a new business.
If you would like to know more about corporations and other business entities please contact Stephen Goldstein at Sgoldstein@sgoldlaw.com, or at (212) 586-5555.