When you’re ready to start your own company, you’ll need to select the type of legal structure for your business. This decision impacts many important aspects of your business including personal liability if a lawsuit should arise. Here are two main options for setting up a business while protecting your personal property, assets, and your family’s financial future:
Limited Liability Company
A limited liability company (LLC) offers you certain benefits that being a sole proprietor does not. A few of the most important benefits of running an LLC include:
- Limited personal liability. As the owner (or a member) of an LLC, your liability for the actions of the business is limited. Therefore, if a lawsuit arises, your personal belongings and assets—such as your house, car, and bank accounts—are not at stake if someone sues the business.
- “Pass-through” taxation. When you form an LLC, you can claim the tax losses of the business on your individual tax form. This often benefits how much you’re taxed, especially if the business is your sole source of income. However, you may also choose to be taxed as a corporation or partnership.
Forming a corporation is also a good option for limiting your personal liability in business disputes. Corporations share benefits and are structured differently. The most notable benefits of corporations include:
- Limited personal liability. Just as with an LLC, a corporation protects its shareholders from personal loss in the event of a lawsuit.
- Outside financing. Although each individual in a corporation likely put up capital to become a shareholder, the business itself is financed through the sale of stock. These profits are then retained by the business for use or disbursed to the shareholders as salary.
- Taxing on income. Similar to an LLC, shareholders can claim profits or losses on their personal tax forms. However, individuals also pay capital gains rates on dividends or the individual rates on profit share and capital.
Your Next Steps
If you’re the sole proprietor of your business, you’re 100 percent liable for the problems, debts, and actions of the business. If you want to choose an alternative business structure for your company, hiring a business lawyer can help. Our legal team at Kirshenbaum & Kirshenbaum is ready to answer your questions and discuss your business needs today. Fill out our online contact form to get started.