Not too long ago, I attended the Women Entrepreneurs of the 21st Century Conference put on by the Small Business Resource Network. The statistics presented were astounding.
According to the 2016 State of Women-Owned Businesses Report, more than 30 percent (11.3 million) of the country’s businesses are women-owned, generating nearly $1.6 trillion and employing over 9 million workers. But significantly fewer dollars are invested in women-owned enterprises. Female entrepreneurs lack available female advisors, mentors, and professional service providers.
Yet I was struck how few of the guests were from professional-service industries. So for potential women business starters, in addition to finding your trusted advisors early in the process and letting them guide you toward success, here are key choices to consider.
BUILDING A STRONG FOUNDATION
Choosing an entity type to use can affect the business itself and its owner(s), how the entity is governed, the types of liability protection available, the lifespan of the entity, and the structure for taking on capital and growing the business. While a sole proprietorship may cost less and involve fewer formalities, other entity types might be better for different companies. No matter the entity type, it is important to have a solid business plan and agreement on a governing structure. An attorney can be very helpful here.
A common misconception is that it is best to incorporate in a state with favorable business laws, such as Delaware or Nevada. Incorporating in a foreign jurisdiction may be appropriate in some instances, but that is not always the case. Any company that qualifies as “doing business” in California must be registered to do business in this state and will be subject to taxes in this state and the laws of this state (even though the entity itself may be governed by the laws of a different state). What is right for each business will depend on the industry, individual goals, and the long-term plans for the company.
Some entities provide protection for individual owners from direct liability from company debts. The type of protection, and to whom protection is provided, is dependent on the entity type. There are limitations.
For one, under the alter-ego theory, courts have entered judgments against individuals to pay the debts of limited liability companies and corporations on the basis that the two were not separate enough in order to give the individual protection. Foremost, the owners must maintain separation from the entity itself. They cannot treat the assets of the company as their own. They must keep a separate bank account (comingling of funds is perhaps the most destructive factor) and must only make distributions to the owners as provided for in the governing documents.
The entity should be adequately capitalized to cover its expenses, have a business address, enter into contracts in the name of the entity, and follow the formalities of the business (including, in the case of a corporation, holding annual shareholder meetings).
Debt that is personally guaranteed by the owners is another trap. Some types of entity debt will not be forgiven if the entity becomes insolvent and will fall to the owners to repay, including loans that are personally guaranteed by the owners (a requirement that many banks will impose) and tax liability. Business owners should be mindful of debts that will not be released if the entity becomes insolvent.