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Business structures and tactics to limit personal liability

On Behalf of | Jun 30, 2020 | Firm News |

Once you have a solid idea for a business in place, you need to decide what structure fits your goals for your company. Options include sole proprietorship, partnership, limited liability company or a C or S corporation. Each has its own benefits and drawbacks. However, when it comes to liability, unless you make efforts to safeguard your personal assets, you could lose them if someone sues and wins a judgment against your company.

Particularly if you plan to open a business in an industry that has a medium to high risk of liability, you may want to give attention to business structures and other factors that limit your personal liability.

The limited liability company

Many entrepreneurs who wish to protect their personal assets do so by creating LLCs. An LLC is not difficult to operate and has a number of tax advantages. The IRS sees you as self-employed, so rather than paying a personal income tax and a business tax, you simply report your share in the company’s profits and losses.

You may have as many owners as you like when you incorporate your business this way. However, a drawback associated with limited liability companies is that coming up with capital may be more difficult: Most investors prefer not to put their money in LLCs.

The S corporation

Like an LLC, an S corporation also gives you tax benefits and protects your personal assets. However, S corps are more complex to operate, involving regular board meetings and complicated compliance requirements.

Compliance and insurance

In addition to choosing the right structure, you must also file the appropriate paperwork, pay associated fees, maintain licenses and meet all other compliance requirements. No structure alone will fully protect your business and personal assets.

While fully understanding what each business type entails is the first step toward reducing liability risk, adequate business liability insurance is another necessary step.