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Dispelling Business Formation Myths

Redmond Law Group March 27, 2023

Business Consulting Meeting Working and Brainstorming New IdeasStarting a business is the dream of many people in the United States, the “land of opportunity.” According to the Commerce Institute, five million businesses were started in 2022. More than one million new businesses were formed in each quarter of the year. Though many living among us or even living abroad want to own businesses here, misconceptions about business formation abound, and can slow the start-up process and make it difficult to move forward.  

If you’re looking to start and operate a business in Troy or anywhere else in Michigan, including Oakland or Macomb counties, contact me at Redmond Law Group. As a business law attorney, I’m ready to guide you through every step of the business formation process. Set up a consultation today.  

Common Questions & Misconceptions about Business Formation 

The first step in starting a business after deciding what type of business you want to operate is to choose the business format that suits you best. Your basic choices are a sole proprietorship, a partnership, a limited liability company (LLC), or a corporation.  

Your personal liability in your business venture will hinge largely on the format you choose. If you run a sole proprietorship, you as the owner are personally responsible for all debts and lawsuits should the business fail, or even while it succeeds but runs into difficulties. The same is true with a partnership—the partners are personally liable. With an LLC, the co-owners are known as members, and for the most part, the business itself will be held liable. The same goes with a corporation—the corporate entity is liable, not the shareholder owners. 

With that background, here are some common misconceptions I’ve encountered from people looking to start a business: 

Choosing a business entity is only important for a large enterprise. 

This is not exactly true. Shielding yourself from liability is a huge concern when you’re going into business. Starting a sole proprietorship is the simplest and fastest route to opening a business, but it exposes whoever runs the business to personal liability. Only when you form an LLC or corporation can you escape, for the most part, from any personal liability. There are also tax considerations. 

You must be a U.S. citizen to own an LLC. 

Though foreign nationals are not legally authorized to work here without a visa or obtaining permanent resident status, the same restriction does not apply to starting a business here, including an LLC. You will need to follow the formation rules of the state where you hope to operate, but being a foreign national is not a bar to business formation. 

Incorporation provides absolute immunity. 

While forming a corporation can be a shield against personal liability in that the corporation is the liable entity, there are filing, recordkeeping, and ongoing administrative duties that must be adhered to. There is also the concept of “piercing the corporate shield.” This refers to the legal process of showing that the corporate identity is merely a cover-up and that the business is really run by and for the owner or owners to dodge liability. If you want to incorporate, you’ll need to follow all the rules that bind the entity, including the requirements of the Internal Revenue Service (IRS). 

You won’t have to pay taxes if you form an LLC in another state. 

There can be advantages to forming a limited liability corporation in certain states in terms of cost and the overall process, but if you operate the LLC in another state, you will still be subject to business taxes and other fees in that state. 

A sole proprietor can’t have employees. 

Unless your sole proprietorship is operating out of your home office via the Internet, you’ll probably need to have employees to help you sell your goods or provide your services in a brick-and-mortar setting. So, yes, sole proprietors can and probably usually do have employees. Then, of course, the business will be subject to federal and state employment laws and regulations and also to withholding taxes and other obligations. 

You don’t need an attorney to start a business. 

It is not advised to start a business without the experience and guidance of a lawyer. While it’s true that you can obtain your permits and licenses—and complete other necessary actions—on your own, a business attorney can help you strengthen your business from the very beginning. After starting your business in whatever format you choose, you will need ongoing legal advice and assistance. Be smart and have legal help at your fingertips throughout the whole formation process and the subsequent operation of your business. 

Take Legal Action Today 

If you’re looking to start your own business in or around Troy, Michigan, do your homework and make sure you have reviewed all the legal requirements and protections you need for a successful enterprise. Contact me immediately at Redmond Law Group, and I will advise and guide you through the entire process, and then function as your ongoing legal counsel once you’re up and running.