Brad is an associate professor of law at the University of Colorado. He is the founder and director of the Silicon Flatirons Center’s Entrepreneurship Initiative. Launched in 2008, the Initiative creates a high velocity of interaction between the CU campus and the Front Range’s high-tech entrepreneurial community. Brad has been a Techstars mentor since 2008.
Many entrepreneurs are surprised to learn that a business is already a legal entity—at least, technically—even if the owners did not act to legally form the company. This is like thinking you’re not going to the prom only to find out that your parents have already arranged the date.
Like a prom date arranged by your parents, the default entity for your business is probably not the one that you want to dance with, let alone get married to. The following are three key drivers to guide when and why you need to select a legal entity that fits your business.
First, a legal corporate structure will limit your personal exposure. Ask yourself—if something goes wrong, could my business create liabilities (costs) that should be separate from me as an individual? Can the business, rather than me, shoulder the costs? Every operating business is, by default, either a sole proprietorship (if operated by one person) or a general partnership (more than one person). Here’s the problem: these legal forms do not separate a business’s liabilities from a person’s individual liabilities. As a result, ...