Small Business Formation and Succession Lawyer

Serving Denver, Highlands Ranch, & The South Metro Area

Few decisions are as exhilarating as the decision to start your own business. Getting married? Having kids? Maybe these are bigger deals. Maybe! But just like forming a family, starting a business is a life-changing decision that, whatever the outcome, will forever change any person who gives it a shot.

The challenge facing every aspiring business owner is deciding how much and in what to invest your usually limited resources as you are getting your business off the ground.

For many new business owners, acquiring customers is, of course, an urgent and obvious need. Spending on that acquisition is an easy call, and can even be fun. Much less fun, but maybe more important, are defensive investments in protection and security. These investments, like insurance for employee or customer injuries, or backups and firewalls for your data, are not sexy, but are just as necessary as investments in growth. Without adequate insurance and protection, one moment of bad luck, or one encounter with the wrong person, can undo years of hard work in an instant. And the problem with not building these protective measures in from the beginning is that it does not get easier as the business matures. The opposite, actually.

One protective measure in which every serious business needs to invest is the right legal foundation. Legal decisions that you make at the beginning will either provide the foundation upon which your business grows or the anchor that keeps it tied down.

Three of the most common problems that seriously harm or even end businesses are often baked in from the beginning. Which of these are you facing?


Missed Asset Protection

The primary reason most people go through the hassle of setting up a business is because they want to segregate their business liabilities from their personal liabilities. If a customer slips and falls in your parking lot, or injures themselves using your product, or comes to believe that you misled them in some way (if you are in business long enough, you will have that crazy customer who cannot be satisfied, no matter what you do), or experience one of the myriad of other events that can lead someone to believe you owe them money, you are going to want your potential liability to be confined to your business assets, and not be able to extend to your personal assets too. And vice versa. If you develop a liability in your personal life – via a car accident, a divorce, or bad medical luck, for example – you don’t want your business to have to be liquidated to cover it.

Being able to set up legal entities that are separate from ourselves and which entities have their own assets and liabilities separate from our personal assets and liabilities is one of the great innovations of western law, one that has unleashed economic dynamism unlike anything previously seen in the world. But despite the widespread acceptance of using business entities for asset protection, that protection is not automatically bestowed upon every person who files the required paperwork. There are specific steps you need to take well beyond that to avail yourself of that protection. Many people fail to properly take those steps.

Generally, the courts and legislatures require that, if you are going to receive the asset protection benefits that come with a business entity, you are going to need to make some sacrifices and commitments. As a society, we do not want to allow people to avoid their debts, injure others, and shelter money from taxes by filling out a short form and paying a small fee to a Secretary of State’s office. If you want the courts and the IRS to treat your business as though it is separate from you, then you need to treat it that way too. That means being disciplined about:

  • Being clear with others when you are operating on behalf of your business and when you are operating on behalf of you. Putting a company name on a car you use for personal errands is an example of behavior that can blur those lines. If you injure someone with that car while making an off-hours burrito run, you better believe that the person you injured will be naming your business as a defendant in the coming lawsuit. Will the business be forced to stay in that lawsuit and potentially pay a judgment? The blurrier the lines between you and your business, the more likely the answer will be yes.
  • Keeping your personal finances separate from your business finances. Too often, business owners view the business’s money as their money, indistinguishable from their personal funds. They do things like buy their groceries or pay for nights out with their business credit cards. A judge being asked to protect your personal assets from your business liabilities will ask, “If you didn’t treat the business’s money as separate from your own, why should I?”
  • Putting rules in place about how you will operate your company, and following them. One of the requirements for forming a corporation is that you must have bylaws in place, explaining how your company will operate. The amount of work that goes into creating those bylaws can be a significant impediment to starting a business. The more recently created “limited liability company” has exploded in popularity, and is now by far the most common way to start a new business. The appeal of the limited liability company is the minimal requirements that need to be met to start one, especially in comparison to a corporation. In many states, all you have to do to create an LLC is file a short form with the Secretary of State letting it know the name of the company, its mailing address, and the identity of the person authorized to receive official papers on its behalf (e., the “registered agent”). The fee for starting an LLC can vary widely from state to state, but in many states is less than $100. No bylaws or board of directors required.

It can be tempting for someone starting an LLC to follow those minimum steps and then stop. But if you find yourself someday trying to convince a judge that your business is more than just your mere “alter ego,” the optics matter greatly. Remember that if a judge is asked to shelter your personal assets from the liabilities of your business, even if that means your creditors are going to receive less than you owe them, he or she is going to want proof that it really is a business, and not just a “veil” that you hide behind when it is convenient. Although it is usually not required, having an operating agreement in place that you follow, even if you are the only owner, can be helpful to proving that, yes, this is a real business, not a sham that you use merely to hide from creditors.

If you’re starting a business and would appreciate legal guidance on these and other issues, please give us a call to set up a complimentary Discovery Session to see if we can help.


Ownership Disputes

If you are going into business with someone else, it is critical that you establish a process for resolving disputes between you as early as possible, long before a dispute arises, while you still like each other. The problem with business partnerships is that, in many ways, they are as much of a commitment as marriage. Your financial well-being will be as tightly tied to your business partner as it would be to a spouse.

Unlike marriage, however, business partnerships require almost no formality to create. You can be found to be someone’s business partner, and responsible for his or her liabilities, even though you never explicitly agreed to it.

Moreover, the rules for who gets what when an LLC breaks up are far less clear or developed than what happens when a marriage ends. If you and your partners never put rules in place about whether you are going to use arbitration or litigation, where disputes will be heard, which state’s law controls, who pays attorney fees, etc., you are leaving these decisions up to a judge who never met you before. If your business is an LLC, that judge will have very little case law to guide him or her because LLCs are such a recent creation. In other words, the outcome will be almost entirely unpredictable.

The number of business partnerships that end acrimoniously is probably at least as high as the number of marriages that end badly. In other words, the chance that you will need a system in place to resolve disputes is high, yet the number of people who plan for it is abysmally low.

If you’re starting a business and would appreciate legal guidance on these and other issues, please give us a call to set up a complimentary Discovery Session to see if we can help.


Tax Problems

Significant tax problems often sneak up on new business owners. Especially ones who are used to having taxes withheld from a paycheck and have never paid quarterly estimates before. For a lot of businesses, this isn’t necessarily a problem right away, because the net income, and the resulting tax burden, of a new business is small or non-existent. New business owners often get surprised by that first significant tax bill after a couple of quiet years. It is not unusual to hear about business owners suddenly finding out that they have five- or even six-figure tax bills for which they have done nothing to prepare.

Tax decisions should generally be guided by an accountant, preferably one with knowledge about any peculiarities specific to your business. But the legal decisions you make about which type of entity to form, whether to use multiple entities, how to distribute profits and losses, and who owns how much of which entity will all have significant impact on your taxes. These decisions get reported to the IRS at formation and can be difficult to undo years later. Ideally, you have an accountant and a lawyer, conferring closely with each other about these decisions.

If you’re starting a business and would appreciate legal guidance on these and other issues, please give us a call to set up a complimentary Discovery Session to see if we can help.


Contact The McKenzie Law Firm for a Consultation

If you have business legal needs, from forming your business to making sure it gets transferred to the right people at the right time, the McKenzie Law Firm can help. Dan McKenzie is an experienced business attorney whose goal is to help clients successfully manage their businesses, provide expert advice and tools and make this aspect of their business easy to understand.

If you’d like to learn more about how we can help, contact the McKenzie Law Firm today. Contact us online or call (303) 500-8846 for more information.