Owning a business can be a worthwhile goal on its own or simply a means to an end. For some, running a business and finding ways to make it successful are enjoyable challenges, regardless of what kind of products or services are offered. These entrepreneurs may undertake many new ventures over the years.
For others, however, operating a business is just a way to make a living doing something they are already passionate about – like art or music. Unfortunately, those who own businesses by necessity (the latter group) sometimes overlook important details that can jeopardize both their business success and their personal finances. For this and other reasons, it’s a good idea to seek help from an experienced business law attorney.
As just one example, consider the decision about how your business will be structured for tax purposes. Common examples include sole proprietorships, partnerships, limited liability companies and corporations. Each structure has various advantages and disadvantages, and it may be tempting to choose a sole proprietorship because it is relatively easy to set up. Taxes are also filed on your personal return rather than needing to be filed separately.
But sole proprietorships can also be risky, leaving the owner personally liable for any business debts. A recent news article gives the scenario of a musician who opens up a school/shop to teach private lessons. In this hypothetical scenario, the business owner is eventually forced to close the school because the business is unprofitable.
If the business owner established the shop as a sole proprietorship, he could potentially be held personally liable by teachers who had not gotten paid and by students who had prepaid for lessons they did not receive. Any lawsuits could put his personal assets at risk.
If the owner established the music school as a limited liability company, however, he would be better able to shield his personal assets from the misfortunes of the business. By definition, LLCs limit the personal liability of owners.
Of course, there are many other examples of potential pitfalls business owners may encounter if they are relatively inexperienced in the business world. The good news is that most of these mistakes can be avoided if entrepreneurs are willing to make some wise investments up front. Perhaps the best investment one can make is to consult with an experienced business law attorney.