‘What Kind of Entity Will You Be?’

You’ve got a great idea about launching a line of cosmetic products or a craft brewery. What are the first steps to make it a reality?

“Get a good attorney, a good CPA and a good insurance agent,” says Scott Schulten, a business/corporate attorney at Schulten Ward Turner & Weiss in Atlanta. “Those are the three people you need most when you start a business. Because no matter what you do, you run the risk of messing up, and those are the people that can protect you.”

Whenever a potential business founder comes to Schulten, he asks them about their business plan, capital requirements, and, first and foremost, their business structure. 

Or as he puts it: “What kind of entity will you be?”

He asks that question, he adds, “because often they don’t know, but may think they know, what they want to be.”

Options include sole proprietorship, partnership, corporation, and limited liability company (LLC). “Almost all businesses these days are formed as an LLC,” Schulten says. “Such entities are easy to set up and maintain, requiring no separate board of directors and no annual meetings of shareholders, as would be the case with a corporation.”

If, for example, your company will acquire property it plans to sell someday, an LLC is the way to go, Schulten says, to avoid “double taxes”—at the corporate level and again when funds are distributed to owners/shareholders. But if your company is going to employ the owner or owners, he notes, “You may want an S-corp, so as to take advantage of certain employment tax savings. … There are almost no situations where a sole proprietorship is appropriate, as there is no third-party liability protection, and no tax advantages, as such. Maybe your son or daughter who wants to mow neighborhood lawns for a summer could do so as a sole proprietorship, but not much else.”

Eric Teusink at Williams Teusink in Decatur says the vast majority of his corporate formation work is related to LLCs—“virtually 100%,” he says—because “the structure of an LLC allows for maximum flexibility.”

Teusink’s small firm—an LLC, for the record—serves small businesses, including real estate companies, craft breweries and distilleries. The needs change depending on the type of business, but not much. “The main thing is coming up with an operating agreement that all members of the LLC can agree on,” he says. “The most important of those private laws typically revolve around how company decisions are made and who gets the money the company makes. If those laws aren’t clear, then it leaves room for dispute, and disputes turn into litigation. Litigation benefits nobody except the lawyers needing to pay for their kids’ college savings accounts.”

Helping small startups never gets boring, Teusink says. “You’re exposed to a wider spectrum of the legal issues, and know where all the legal risks lie, with small startup businesses. So you’re not hyper-specialized into a specific silo, like you might be at a white-shoe law firm in a Midtown high-rise.”

Sonia Lakhany is hyper-specialized. At Lakhany Law, which is headquartered in Atlanta but operates nationwide, Lakhany focuses on trademark law. 

“I counsel and advise on the protection of business names, logos, slogans, taglines,” says Lakhany. “You want to make sure, for example, that the name you choose for your company is available for use, and that you’re not accidently or unknowingly stepping on someone else’s toes.” 

She remembers a client from a few years ago, an entrepreneur who was ready to roll out a small chain of beauty supply stores. “They already had a name they were very committed to, and they were about to get a whole PR campaign going: had materials designed, a color scheme, all of that,” says Lakhany. 

“We went through the clearance process to see what was out there and within minutes found a hit—another company, a national brand with locations in Georgia and most of the 50 states,” Lakhany says. “My client was disappointed at first, but the alternative is finding out later. That can be really expensive.”