To be clear, when we say “company”, we’re not talking about the in-laws and their stress-filled long weekend visit. We’re also not thinking of a musical theater troupe, or an infantry unit. We’re talking business here, folks. But even with that clarification, we're still left with a huge variety of meanings for the kind of company whose primary reason to exist is to do business.In the fascinating* world of business law, “company” is often used as an umbrella term for a variety of specific legal entity types, from corporations to LLCs to a number of more exotic species of legal entity like limited partnerships and professional limited liability companies. Or “company” can describe a conglomerate - a parent entity with dozens or even hundreds of subsidiary entities - each of which may have their own subsidiaries, and so on. Think 3M or General Mills.
“Company” can even mean a single person or a couple of starters (that’s what we prefer to call “entrepreneurs” at Startomatic) with an idea about how to make a profit - and not much else.
If you're a founder who’s ready to take your idea out of the planning stage and into the doing stage, you probably want to know exactly why you’d want to form a legal company. Lucky for you, we’re about to tell you!
The "Legal Fiction"
You can't toss a corporation up in the air and catch it at the last minute, like a toddler. You can't graffiti an LLC like your neighbor's garage door. So what good is it??
Business entities are what lawyers like to call "legal fictions" - they are made up things that only exist because we people have decided to agree that they exist.
Why did we agree to do this, you ask? Well, the main reason is to encourage businesses to take risks. How does this work? It’s pretty simple, really.
Let’s say it’s a time before legal entities existed, and you make awesome empanadas. So, you decide to sell them. Business is great, you sell mucho empanadas, hire three empanada stuffers, and make a lot of money. But then one day your just adorable toddler accidentally switches your corn meal out for powdered arsenic, and your next 100 customers each spend three weeks in the ICU. Don’t worry, they all fully recover. But do worry, because after they recover, they all sue you. And because you were in the wrong, the court tells them you owe each of them $100k. So that’s… a lot.
And not only that, but you also owe your cornmeal guy like $500, and he’s all “Where are my pesos, dude?” and you don’t have them because your customers have all been in the hospital for three weeks. So the court says you have to pay him, too.
What do you lose? Everything. Your house, your car, the $100 you had saved for that toddler’s college fund, everything. Terrible, right?
The Magic of Limited Liability
Governments and economists said “Yes, that’s terrible, we need to fix that, because you can never have too many businesses. Or too many empanadas." So they created the legal concept of “limited liability”, meaning that you could start a business and - no matter how badly it goes - you can only lose the amount of capital (money) you put into it. With limited liability, only the business’s assets can be reached by creditors - not your personal assets. So your house, your college fund, your collection of Hummel figurines - they’re all protected from people your business owes money to.
And that’s really it - the biggest and best reason to use a legal entity for your business is limiting your possible liability to the money you put in the business. And the great news? All business entities - LLCs, corporations, and others (with the exception of sole proprietorships, which aren’t actually entities at all) - offer this same protection.
Are there some exceptions to limited liability? Yes. But they’re mostly for people who intentionally abuse the system - and that’s not you, we know. But if you’re interested, we’ll have another blog post on that soon.
Ok I Want to Form a Company - What Next?
Turning your idea of a company into a legal company is an important step that requires some specific decisions, including (a) what type of legal entity to create, (b) what state to form your entity in, and (c) what to name your company, among other decisions.
Luckily for you, we have blog posts with answers to all three of those questions, here, here, and here. Now go forth... and take (smart) risks!
*Well, fascinating to those kind-of-strange corporate lawyers.
Our lawyers made us put this here: This Starter Post is for informational purposes only. It is not intended to provide any legal or tax advice.
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