“Should I make a company?”
This is one of the most frequent questions I receive; and the answer depends on the type of business you are intending to operate, your plans on financing it, and your exit strategy. But before we can even get to that answer, I find it is important to provide a general understanding of what makes up a company, and the roles, responsibilities and liabilities, of the individuals involved in the company.
Which is somewhat telling, in that the number one question is NOT “what is a company anyways?”. See, people think they know what a company is, which is not the case: I hate to tell you this, but television and movies might, just maybe, have lied to you. But that is the topic for another day. For now, I want to address some of the critical (And generally known) aspects of what a company is, and why you might want to incorporate.
Lets start with what a company (which I might refer to as a “Corporation” at times) is considered to be. A company is considered, under law, to be a “person” capable of holding property, entering into contracts, and conducting business. It is important to recognize the difference between being “considered a person under law” and “is a person under law”. A company has no arms, no mind, no pockets to hold things, no hands to sign contracts; but all the same is considered under law as being capable of doing those things. A company therefore needs to have someone (I will refer to them by their legal term, “Individuals”) doing things for, and on behalf of, the corporation. Individuals are living and breathing, with minds to think things and a physical existence capable of doing things.
Those Individuals that can do things for, or on behalf of a corporation, fall into three categories: Officers, Directors, and Agents of a corporation. Directors tend to be the “brains” of the Corporation, providing the big picture direction to the day-to-day operators of the Company; which are usually the Officers (for example, the President, Chief Operating Officer, a Vice President) of the Company, who in turn retain and provide instruction to agents of the Corporation (for example, a corporation’s lawyer, or accountant, or its employees).
If someone is acting on behalf of a Corporation, it falls under one of these three categories; with the power to act on behalf of the corporation, and the scope of that power, flowing like a water from the top of the waterfall (the Directors), with those powers the Directors wish to delegate to the Officers, and likewise those powers of the Officers wish to delegate to the Agents (subject to the Directors allowing such delegation). Everything starts with the directors; but it is not uncommon, particularly in very small companies, such as entrepreneurial start-ups, for the shareholder, director and officer of the company to all be the same individual.
You should note that “shareholder” was not one of those three categories of individuals that can do things for, or on behalf of, a company. The shareholder is a mostly passive role when it comes to operation of a company, with at least one, and maybe up to three things it can do with respect to the corporation: vote at a meeting of shareholder, participate in the sharing of the profits of the company, or receiving a portion of the assets of the company on its winding up. Because of the passive role of the shareholder, a shareholder generally does not share in the liabilities of, or become liable for, the actions of the company. There are a few, very specific examples of a shareholder having some liability for the acts of the corporation, but they are rare, specifically created by statute, and usually related to environmental protection laws.
So, after all that, we can see why people might want to start a business as a corporation: it is considered its own “person” under law, and therefore is taxed separately from the individuals that may be its shareholders. It also provides a layer of “isolation” between the actions of the corporation, and the assets of the shareholder: if a corporation is sued, then that does not mean that the shareholders will be sued as well, as they are generally isolated.
And armed with this knowledge, many entrepreneurs launch themselves headlong into business, comforted by the knowledge that they went to their local registry offices and incorporated, or they paid their accountants to do the same; and therefore they are safe! Here is the problem … many times they aren’t, because they forgot (or weren’t aware of) the first thing we talked about: the three categories of who can do things for a Corporation.
In part 2, we will use an example to identify why a corporation might not be the solution you think it is.
– Craig K. Sherburne
Content is not intended as a legal opinion; and readers are cautioned not to act on the information provided without seeking legal advice on their unique circumstances.
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