Deciding on your business entity

Deciding on the Entity When Starting a Business

Questions arise when a person decides to start a business. One of the most important is the type of entity that should be used. The answer to this question is usually arrived at by considering several factors, including tax consequences, liability concerns, the purpose for starting the business (and I don’t mean making money), and the parties involved (the owners). This article will touch on the liability concerns. There are three main entities to consider, with various subtypes within each.
Sole Proprietorship: This is the situation many small business owners find themselves in. There is probably no formal entity established. You might have a separate bank account. You probably have cards, and/or flyers with the name of the “company”. You may have filed a d/b/a (“doing business as”) certificate with the county. What you do not have is liability protection. If someone sues the “company”, they are really suing you personally. If they obtain a judgment, they can take your personal assets and money from your bank accounts. While there are restrictions on what they can take, the fact is your personal assets are at risk.
Partnership: 2 or more people want to start a venture. While there may be formal documentation on the partnership, there has been no formal incorporation with the State. Under this General Partnership, you will not only be liable for your acts, but possibly the acts of your partner as well. Again, you have little or no liability protection. You can solve this problem by forming a Limited Partnership. Then, under normal circumstances, your liability is limited to your investment.
Corporation: I think everyone has seen the phrase “Corporation”, “Inc.”, “Incorporated”, “LLC”, “Ltd.” or “Limited” as part of the name of a company. This means that this company has been incorporated with a State or foreign country. There are several variations of the corporate structure, too numerous to explain in this article, but suffice it to say that most do pretty much the same thing; they protect your personal assets. An investor or owners’ liability is limited to their investment, in most cases.

In any of the limited liability scenarios above, there are always circumstances where you can lose that liability protection. Always see an attorney of your choice, and talk to an accountant, before venturing into any of the above.