Legal / Startup Life

LLC vs Sole Proprietor

Brandi Howard is a Partner at Young, Howard, & Humphrey, P.C.  She is a licensed attorney in the state of Texas and a graduate of The University of Texas School of Law.  If you have further questions, you may contact her at bhoward@yhhlaw.com

I want to go into business with my friends and family. Do you suggest that we procure legal binding documents? If so, where do we start?

Going into business with anyone is tricky and has its own issues and hurdles for you to overcome, but you go into business with others to use everyone’s strength to achieve success.  Being in business with family or friends brings up particularly sensitive issues because you have important personal relationships that could be affected by this new legal and economic relationship.  It is important to be keenly aware of that.

That being said, as an attorney, I would tell anyone that it is a good business practice to have legal documents in place for any business regardless of who the members, partners, or shareholders are.  Most governing documents will require or allow you to have certain binding procedures and split the interest, equity, and/or voting power in the business as you determine.  Your state typically creates certain mandatory procedures and requirements that you should be aware of, i.e. requirements for meeting notice, to have a board of directors, and to hold annual meetings.  Certain business forms require different filings—a Partnership will typically require a partnership agreement and a Corporation will typically require Articles of Incorporation and Bylaws.  An LLC typically has more flexibility with the type of documents necessary for it’s creation.

Having bylaws or the equivalent in a partnership agreement that lay out different procedures for dealing with disagreements and business decisions, policies that you view as important, and clarifying powers, positions, duties, interest in the business, etc., will give you a clear understanding at the outset of your venture that will help avoid personal conflict that could wreak havoc on your personal relationships and your business’s success.  These documents can become a neutral standard that set out expectations, are helpful in managing your business, and minimize litigation risks from disputes.

I have been running my business for 4 years but I am not registered as an LLC. Do I need to register as an LLC?  Am I just considered a sole proprietor?  What is the difference?

If you have not filed any specific document for your business to become a specific kind of entity with the proper body in your state (typically the secretary of state) you are a sole proprietor.  This is the default and most basic form of business.  If it was an ideal form of business the other entities would not likely exist.  The main consequence or risk of your sole proprietor status is unlimited liability.  What I mean by that legal term, unlimited liability, is that both your business’s assets and your personal assets (home, car, savings, etc.) are fair game if the business is sued because in the eyes of the law you are the business.  One of the main benefits of establishing a legal entity is to avoid that type of liability—to be clear, a standard partnership typically has that liability as well.

The reason why an LLC (Limited Liability Company or Corporation, depending on your state) is generally a favored form of business is that it creates a business entity that you can continue to run like a sole proprietorship and typically receive the same kind of tax treatment (or elect corporate tax treatment), but outside of highly irregular circumstances (where a legal action called piercing the corporate veil is available), law suits can only reach the business’s assets.  That partially answers the question of the difference between a sole proprietorship and an LLC and that is about as much an answer as someone can give you.  The difference can be very great or just the liability portion.  The LLC, regardless of state, is a very flexible form of business that can achieve the benefits of a sole proprietorship, partnership, or corporation and limits your personal liability in almost all circumstances.

For someone running a business as sole proprietorship, currently an LLC is a popular choice and often the best one for his or her circumstances.  I could not give you specific advice without knowing your circumstances and I would encourage you to speak with an attorney in your state (I am in Texas) to determine what the best form for you would be.  It is most likely to be an LLC and the process for creating the entity is typically very simple.

I plan on creating a brand ambassadors program for my company. I want to have a morals clause. What are your thoughts and what steps should I take?

This is a tricky employment law question.  This issue is very dependent on your state and its laws.  A morals clause is generally acceptable in most states, particularly in the South; however, its wording and requirements will be very important.  You should speak with an attorney who is familiar with the laws of the state you are headquartered in and who can become familiar with the relevant laws in any state you are going to run the program in.

Such a clause may have an affect of discrimination.  The main federal laws (Title VII, ADA, and ADEA) prohibit discrimination on the basis of race, color, religion, sex, national origin, disability, and age—some states and the district of include other categories like: “personal appearance;” “political affiliation;” “gender identity;” and “matriculation.”  Depending on the wording of your morals clause you could easily run into issues with the “personal appearance” category.  Many states have laws like this, though few are as expansive.  Another factor to keep in mind is that many of these laws have size requirements such as fifteen employees before they can go into effect

If you have any questions for Brandi please leave them in the comments section and she will answer them in our following piece. Or you can send them to blog@imperfectconcepts.com with the subject line “Legal 101 with Brandi”

Disclaimer:  The information and materials on this blog are provided for general informational purposes only and are not intended to be legal advice. The law changes frequently and varies from jurisdiction to jurisdiction. Being general in nature, the information and materials provided may not apply to any specific factual and/or legal set of circumstances.  No attorney-client relationship is formed nor should any such relationship be implied. Nothing on this blog is intended to substitute for the advice of an attorney licensed in your jurisdiction. If you require legal advice, please consult with a competent attorney licensed to practice in your jurisdiction.


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