Businesses build up and managed by families are the backbone of most of the countries for several reasons. Large companies represent compared by the number of enterprises mostly a smaller piece of the whole cake.
One thing out of many which large companies have in difference to small once is the business structure with and in which they are operating. But from the beginning, what is a business structure and why do we need one?
One thing out of many which large companies have in difference to small once is the business structure with and in which they are operating. But from the beginning, what is a business structure and why do we need one?
Introductio
Most start-ups, entrepreneurs and owner of a family-business start the business in the from of registrating a sole-practitioner and maybe setting up once an entity. This can be a partnership or any other from of corporation, such as limited liability corporation. After doing the process of setting the company up it stops, because then the main focus shifts to get it profitable and keep it running. Another point is a document which arrives in a folder and stays there to set on dust is the company agreement or partnership agreement. After setting it up mostly no one reads it regularly, only when some questions appear or someone is asking for it.Reading this document regularly is another subject, but by the way it is to recommend to read your agreement on a regular basis.
Back to the subject, why can be it dangerous to keep your business structure at the stage when setting it up when your business is running and developing great. Every part of your business is developing when business is doing well, best case is it is doing so well and you are landing more and more deals which keep it growing. As it is going this path of scenario every business owner has to scale up capacity in every likely form, production line, employees, IT and so one, but what remains is your business form and structure. Why not scaling it up, too? Or changing it so that it suits your new firm better?
Business structures have several advantages and disadvantages, depending how they are used, set-up and combined. In the first attempt any structure can be split in three categories, sole practitioners or traders, partnerships and corporations. Differences between these forms of entities are found in if it is a Separate Legal Entity, limited and unlimited liability and taxation. This are just a few points by which the three categories of entities can be separated. Interesting for business structuring are partnerships and corporations. Sole traders are not a separate legal entity and have no limitation for liability.
The purpose of business structures are to split your business in by aspects of business operational logical and legally separate entities. It could be suitable to have so several entities in your structure which is operating in a whole together and performs the duties.
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Explained in an example:
We have a business owner which runs a business in manufacturing furniture. This business does all by its own, from the buying of the goods for the production to the manufacturing of the furniture and the sale world-wide.If this business would be operating in the form of a sole trader, then some issues and disadvantages could arise. Beginning from that the business owner is full liable with business as also private assets. Any wrong doing or financial difficulties could hit through into the private sphere, a level of protection is less given or not given at all.
A creditor could get a warrant to collect into your business assets if you are unable to pay your instalments. Any creditor has the choice from where he would like to collect the outstanding balance, private as also business assets. On the other hand your whole business is liable for any happening in another department, so for example if some damages arise out of your produced furniture your business in whole would be liable as also you as a private person.
Lines of defence
In this example a first line of defence would be to seek cover by insurances. This is a form to cover a couple of risks in a cheap and fast form. But as we all know a good insurance company limits the given covers and describes covered risks very strict. This has to be done to keep premiums low and the insurances community as a whole protected. It would be good and to recommend to read the insurance contract in detail, to be aware what is covered and what is not.Your first line of defence is the right insurance for your risks which you want to have covered, in business and private matters. This is a medium strong line of defence, as said it does not cover all potential risks and most likely the cover is limited up to defined amounts. Also when damage happened and you want to get cover from your insurances, they will have to check first if it is covered or not and as said to protect the community they have to search for gaps to get out. This will be especially the case of high value damages / compensations.
As the high value damages or compensations are the once which have the potential to sent your firm into bankruptcy, they have to be covered or your business has to be protected. This could do line two and three of your defence system. Your second line of defence is to disconnect your liabilities from your business into your private assets and the other direction too. Third line is there to protect your business assets one by one or every made package of them.
Both stages are created by disconnecting legally every package which you want to have protected from each other.
Concrete speaking based on our example when operating your business in the form of a sole trader you are fully personally liable. One way of protection would be if you do not own anything you cannot pay any compensations, but this form can have some significant disadvantages. For example a creditor could get a court order by which you have to give a full detail statement of your belongings or you have to declare private bankruptcy, depending on you jurisdiction.
A possible better form of protection could give a corporation, such as for example a limited liability company (LLC). In the following we stick to the example and only to the form of a LLC, this has not to be understood as any form of advice. All given details are general information for your personal situation, please seek advice from a CPA or attorney.
The LLC is a separate legal entity, meaning the company cans enter into contracts and be holder of rights. With this nature of a LLC it can be also be charged or file charges against someone other, possible would be the LLC against a director of the LLC. For our concerns belonging to asset protection any form of liability stays with the LLC, side-note it does not mean that every organ of the LLC is free of any liability. A liability could arise still when a director is not meeting the proper standards of care or acts with the intention to harm the company and profit from it.
The change from operating as a sole trader into the structure of a LLC builds up a wall between your private assets and them of your business, this is your second line of defence.
Summary
So far we had after the introduction to the subject of business structures and a couple of words to what is mostly found. Based on an example the lines of defence were explained, with the first line of defence found in insurances. Insurances are an easy way of covering risks and a cheap one too. But it has to kept in mind how insurances will work and it is to recommend to know what will be covered and what stays uncovered. The wall builds up between your private assets and your business is the second line of defence, in this article we touched on the surface the LLC which might fulfil this duty. The third will be found in your business by itself, protection walls can be build around each of your business assets or each package of them.The third line of defence will be discussed in a following separates post.
