Get Organized to Limit Liability
The need for legal protection begins at the birth of a business and continues throughout the life of all companies. When creating a new business, or exploring options in reorganizing existing companies, businesses must understand their legal options for minimizing liability. Among those options are the proprietorship, partnership, corporation and limited liability company. Even within those broad categories are a number of choices:
Maryland Sole Proprietorships
The Maryland sole proprietorship is generally a one-person operation where the profits, losses and liability flow to the individual. Without formal legal protections provided through the corporate form and limited liability companies, an investor may lose much more than his own investment in the business. In fact, in the event of serious losses and liabilities, all of the individual investor's assets may be subject to the claims of business creditors -- far beyond the assets of the business.
The Maryland partnership consists of both "general" and "limited" partnerships. A general partnership is one in which two or more individuals own a portion of the business assets directly and are all liable individually for the partnership debts. A limited partnership has two classes of partners, general and limited. The general partners manage the partnership with exposure for the liabilities of the business. The limited partners are usually shielded from liability for business debts beyond their investment in the business as long as they are not involved in the management of the business.
An entity in which one or more individuals own shares of stock in a business rather than the assets directly. A corporation generally provides a shield from individual liability as long as corporate and individual assets are kept separate. While the "corporate veil" of protection is very helpful in protecting its shareholders from personal liability for major debts and losses, the process of incorporating a business invites a host of income tax options which may affect the precise form of each company and the financial stability of its owners.
Two major corporate forms are known as "S corporations" and "close corporations." An S corporation provides many small businesses with the protection of a corporate shield from liability and the tax benefits of declaring profits and losses on the stockholders' individual tax returns. Some states provide for a statutory close corporation which allows individual stockholders to manage a company without the formality of a board of directors. In some cases, it may be advisable to form a company using both the S corporation and close corporation forms.
When forming corporations, it is very important to do so with written agreements designed to minimize dissension among stockholders. Accordingly, in companies with more than one stockholder, one must provide for a Buy-Sell Agreement establishing the procedure for buying the shares of one or more stockholders in the event of termination, withdrawal, death, disability and, in community property states, divorce. Where there are only two stockholders, it is essential to add certain provisions to the agreement to resolve deadlocks between the two stockholders which may cripple the business. Although many new businesses neglect this vital agreement, many learn the hard way that these legal protections are much less expensive than litigation.
Limited Liability Companies in Maryland
A relatively new legal form, these Maryland companies operate with the seeming simplicity of partnerships, but with the asset protection of corporations. The members of the "LLC" operate the company under the terms of an operating agreement that sets forth the method by which the company shall be managed on a daily basis and in exceptional transactions. This important agreement also provides for the transfer of ownership rights in the business and many other important events in the life of a company.
With so many options, and major consequences for those making the wrong choice, an experienced business attorney is essential to the business formation and organization process.