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Avoiding Personal Liability in Business

Forming a Company

Avoiding Personal Liability in Business

Surprisingly, many sole proprietors never adopt a legal structure that protects them from personal liability. If losing all your personal assets doesn't appeal to you, it's time to add some structure to your life.

The word "liability" can rock the confidence of even the most seasoned business executive.

It smacks of court decisions, licenses challenged, and large sums of money lost.

However, as important as an issue as this is, it is a confusing one as well, with some important factors being the business structure of the company and the type of business in question.

For the first-time entrepreneur, it makes sense to understand how to protect yourself and your partners from liability before striking out into business.

Operating as a sole proprietor without any legal protection from liability is silly. Your personal assets are at risk, and you could lose everything.

Most people know that incorporation can limit any individual owner's liability to the amount which they have invested in the company.

However, forming a C corporation can be expensive, obligates you to certain corporate formalities such as board meetings, and can result in double taxation.

While it may not be practical for your small business to incorporate as a C corporation, there are other solutions that provide some of the protection of a corporation in a form accessible to small startups that don't plan on going public or raising money from sophisticated investors.

If you simply need a little more protection for yourself, then a Limited Liability Company, or LLC, may be most appropriate for your needs. An LLC is considered a legal entity in and of itself, much like a corporation. As such, an LLC offers liability protection for all members of the company.

Taxation on an LLC is flexible. You can elect whether you will be taxed like a sole proprietor, partnership or corporation. The default election is that of a sole proprietor, which means you don't file separate taxes but rather run the taxes through Schedule C on your IRS Form 1040 personal return.

Proprietors of some special types of businesses, such as architecture or law firms, may not be eligible for LLC status. However, most states allow these groups to register as a similar type of business structure, a limited liability partnership, or LLP. While laws vary from state to state, most states give the same liability protection to LLP partners as they do to LLC members.

If you are interested in registering as an LLC, your least expensive and most reliable bet is to use a web-based service. While these sites will charge significantly less than most lawyers would charge to register your company, they also provide a good deal of assistance and guidance to customers.

Those customers who come in with a thoroughly researched decision on what type of business structure they wish to pursue will see their efforts rewarded, as they will soon be on their way to a sounder business and some well earned peace of mind.