It may be time to protect yourself from the risks faced by your business. Consider the following scenarios:
- You teach yoga classes and a client blames you for back pains she is experiencing.
- You love creating designer wedding cakes, and a member of the wedding party comes down with food poisoning.
- You provide business consulting services. Your client blames you for the failure of his new venture.
Common reasons for using a sole proprietorship or partnership include:
- The owner(s) simply started selling a product or services.
- The owner(s) wanted to check out the viability of a new business before incurring additional legal and tax preparation costs.
However, since the owner of the business and the business are the same, the owner is liable for any business problems, debts, claims or litigation matters.
When should you make a change to your legal structure?
Generally, as soon as possible. Setting up your business in a separate entity enables you to protect your personal assets.
What will a separate entity cost?
You will incur the costs of forming a separate business entity. In addition, each year you will need to prepare a separate tax returns for the business.
What entity should I choose?
The type of entity that is best suited for your business depends on many factors, including the type of business you have and your financial and business growth goals.
LLC stands for Limited Liability Company. LLCs have rapidly become the most popular business entity type for new and small businesses, largely because they are considered to be simpler and more flexible than corporations. The LLC business structure combines the pass-through taxation of a partnership or sole proprietorship with the limited liability protection of a corporation.
One of the benefits of using a corporate form is the ability to issue stock, which is particularly attractive if you are raising money and seeking investors in your business venture.
- All corporations are required by law to observe a number of corporate formalities to ensure that the corporation is operating as a separate entity. These formalities include holding regular meetings of directors and keeping records of corporate activity.
- Profits from corporations may be “double taxed” that is, the corporation is taxed on any profits earned, and the individual stockholders are taxed on the dividends they receive.
If they qualify, either LLCs or corporations can make an election for tax purposes to be treated as an S corporation. The biggest advantage of making the S election is profits and losses of the business pass through to the business owner’s personal income tax, and thus avoid the corporation “double taxation” issue.
There are some circumstances when you can still be liable for claims. You may also want to consider liability insurance.
You may be required to provide a personal guaranty, which makes you personally responsible under the terms of the guaranty. Typically, personal guarantees are required on business loans and leases.
Business legal issues are complex. Business owners should consult with their legal and tax advisers on such matters. For more information on business legal matters, please contact Kathy Tremmel at Tremmel Law, PLLC at (512) 539-0317 or firstname.lastname@example.org.