What is a "legal entity?"

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From the course by Michigan State University

Structure: Building the Frame for Business Growth

12 оценки

Michigan State University

Structure: Building the Frame for Business Growth

12 оценки

Course 4 of 6 in the Specialization How to Start Your Own Business

Just like when building a house the foundation for your business provides the framework for success. A business built on weak structure will struggle to succeed. We'll address some of the most pressing issues that you as a business owner must face while constructing the proper framework for your business. Specifically at the end of this course you will be able to: - create and evaluate your company's financial documents; -complete the documents and regulatory procedures to create a legal business entity; - protect your intellectual property; -develop a management team;

From the lesson

The Frame: Forming the Legal Entity

By the end of this module, you will be able to explain the difference between C-Corps and LLC entities. You will also be able to use this understanding in order to establish your own business entity.

What is a "legal entity?"2:44

Meet the Instructors

Ken Szymusiak
Managing Director, Burgess Institute for Entrepreneurship & Innovation
Broad College of Business
Forrest S. Carter
Associate Professor, Faculty Director of Institute of Entrepreneurship and Innovation
Marketing
David Wheeler
Creative Research Faculty, The Hub for Innovation
Media and Information

[MUSIC]

By now I'm sure you've begun to realize that there are a lot of different

considerations that go into creating a new business.

And the hard part of it all is that every company is different, the same is true for

how to incorporate a company.

In this module, the goal is to highlight the importance of incorporation, and

the considerations you must account for.

My use of the term incorporate, it's specifically referring to the act of

creating a new legal entity for the purpose of running your business.

I do want to mention that we'll be exploring this topic from the perspective

of a company founded in the United States.

Due to the nuances of corporate law,

this topic can vary greatly from country to country.

So I apologize in advance if some of the material does not apply to your

given location.

With that being said, I believe that a lot of the topic matter will be applicable

regardless of geography, so I hope you choose to follow along.

Starting a legal entity is certainly not a necessity as you could decide to operate

as a sole proprietor or basic partnership if you have more than one founder.

But incorporation is now a standard practice in the United States and for

good reason.

First and most importantly is Liability protection.

By creating a legal entity,

the founder can separate their personal finances from that of the company.

Therefore, in the instance of bankruptcy or lawsuit,

the owner will not be personally liable.

There are exceptions to this rule such as gross negligence or

the commingling of funds.

But for the most part, it's this reduction of liability that provides comfort for

many to even think about starting their own business.

Secondly, the incorporation process defines a percentage of ownership amongst

equity holders.

And thirdly, incorporating sets the stage for

the ability to bring on additional owners if necessary.

Every company has its own journey and often times it's not necessary to start

a company when you're just talking about the pursuit of an idea with a friend.

Therefore the logical point to incorporate in my opinion

is when you transition from talk to taking action.

Specifically when money is going to be spent.

It's at this point that you want to make sure that your personal and

business finances become separated to ensure liability protection.

Additionally, these points become even more critical when

there are additional founders to ensure that there is transparency in all

ownership related matters.

To be clear, there's little risk in acting too early other than you might spend money

on attorneys and filing fees for an idea as opposed to an ongoing concern.

So when money and ownership are of concern, it's time to incorporate.

For the purpose of the module we will only be talking about the two most common types

of entities in the United States, which are C- Corporations and

limited liability corporations.

It's not to say that the other forms of corporations don't have their place.

They're just less commonly used by the average start up.

In reality, this topic matter could become an entire course unto itself.

So let's get started by looking at these two options.

[MUSIC]

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