If you are launching a business, it’s important to protect your personal assets from the results of the business. You can do this by creating a properly constituted business entity.
You should never start a business or sign contracts in your own name. Otherwise, you would be putting your personal assets at risk if the business doesn’t work out as you expected. Here is an example of what could happen if you start a business under your own name.
A new life sciences business leases lab space
Suppose you lease lab space for your new venture. The landlord asks you to sign a three-year lease. You sign the lease using your personal name, pleased to obtain desirable space at a competitive price.
After one year, however, the venture doesn’t work out as you hoped, and you decide to close it. Unfortunately, because you signed the lease in your own name instead of in the name of a business entity, you are personally responsible for rent payments for the entire three-year term of the lease. If you had signed the lease using the name of your business entity, you would not be personally responsible for the rent payments. The business entity and its assets would be required to bear the liability.
Protecting you from liability
A properly constituted business entity can protect you from liabilities associated with a business such as creditors and lawsuits. Both limited liability companies and corporations provide a corporate shield to protect you from liabilities.
An LLC is easier to set up and maintain than a corporation and, subject to some restrictions, allows business losses to flow through to the owner so they can be deduced from the owner’s personal income tax. An LLC also has fewer corporate formalities than a corporation. At some point in the future, however, you may want the benefits of a more formal corporate structure to make your venture more attractive to investors.
To ensure you get the maximum benefit of your business entity, you should always seek the help of an experienced attorney. The cost of competent legal advice is usually less than the cost of dealing with a situation that hasn’t been properly structured.
