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Can You Spot This Common Incorporation Mistake?

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Why would you spend the time and money to set up a legal entity--a corporation or LLC (Limited Liability Company)--if you did not plan to use it?  It seems that almost weekly we learn that people have a legal entity they paid for--but they never took the steps necessary to properly transfer their business or its assets into the entity. 

It is easy to set up a Washington corporation or LLC.  You can just go online and do it for "free" using the Secretary of State's online form and paying the State's fee.  Leaving for another day, the quality of legal advice the state gives, in many cases "free" just means you have to spend a lot more money later to fix problems. 

This is particularly true when you have been operating a business for a period as a sole proprietor or partnership before deciding to set up an entity.  It can also become an issue when you are taking personal assets and contributing them to the entity in exchange for your ownership rights.

If you do not transfer the assets the new company is going to use to the entity, you have just gained a short stack of paper that will gather dust in the corner of your office or shop.  You may float along for weeks or years before discovering that you have a potentially expensive and troubling problem. 

If the business gets sued, the opposing party will soon discover that you co-mingled the entity with your personal affairs--by using your personal assets in and for the benefit of the business and meanwhile taking advantage of business tax and other benefits through the entity. 

Suddenly that protection from personal liability for business liabilities you thought you had is not available. 

Another place we see problems from not properly transferring assets is when "partners" get into a dispute.  Suddenly you discover that the computer on which you kept all of the business records is not an asset of the entity--and never was. 

Meanwhile, she takes the position that you did transfer your existing book of business and customer list to the business.  In effect you set up an entity (corporation or LLC) that sat on the shelf with no assets and conducted business using assets it may not have owned.  It can take an expensive and business-killing lawsuit to even try to unravel the mess. 

The solution: make it clear in advance, in writing.  A good rule is that if it is not in writing it did not happen. 

An experienced small business attorney can guide you as to documents and actions needed to make it clear what assets are transferred to the business entity and which remain personal. 

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About this Entry

This page contains a single entry by Howard Bundy published on February 25, 2013 9:31 PM.

Do You Recognize the 3 Worst Employment Claims? was the previous entry in this blog.

Can You Protect Your Brand Name on the Web? is the next entry in this blog.

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