Do It Yourself Business Organization Can Be a Problem

Most people want to save money where they can. That can be really important when starting a business. Money is tight and expenses are everywhere. There are many shortcuts to creating a business entity that can save money. But, in the end, a shortcut can be penny-wise and pound foolish.

Drafting a comprehensive set of operating documents for a business entity is often overlooked by the entrepreneur. Startup focus is frequently limited to getting customers and whatever is essential to serving those customers. The entrepreneur gives little thought to business documents for three reasons.

One, the entrepreneur does not understand the importance of business organizational documents. Two, organizational documents are most important when a problem arises and business problems at the start do not usually involve entity structure or organizational documents. Three, the entrepreneur does not even think about organizational documents.

Many set up entities online by either do-it-yourself forms on the Florida website or using a service that provides preprinted forms. Why is that a problem? Many times, it is not. Like driving a car, the driver only needs insurance when in an accident. Good entity structure and documents are needed when there is a problem, and many businesses do not ever have those problems.

Good planning worries about what might go wrong and not simply count on things going right. With a new business, planning should include choice of entity and the documents that go with it.

Too often an entrepreneur ignores liability protection that might be provided with a corporation or limited liability company. The business starts as a one-person show (sole proprietorship) or a partnership (more than one entrepreneur) and continues as it grows.

Biggest drawback to those arrangements is liability. The sole proprietor is liable for all business debts and claims. General partnership is worse as all partners are liable for all business debts and claims, even if caused by another partner. 

To make matters worse, many partnerships do not have a written partnership agreement. A partnership agreement governs vote required for action, responsibilities of each partner, funding, and should have provision for dealing with a partnership stalemate. Absent a formal agreement, when partners disagree the business can be destroyed.

Some entrepreneurs realize the importance of limiting liability and opt to create a corporation or a limited liability company. Each of these entities has benefits and drawbacks, but at least they offer limitation on liability.

A corporation is chartered by filing articles of incorporation with the State. The statutory requirements for articles are bare bones with little more required than name, address, number of shares and a registered agent for service of legal notices. The State has an online form that anyone can complete and file with filing fee, after which the corporation exists. Such a bare-bones filing omits many important parts of corporate structure.