Entrepreneurs owners should always formalize their business by incorporating or forming an LLC. Sole proprietorships and partnerships offer no protection of personal assets from business liability. Legal vehicles shield the personal assets of the shareholders or members from debts and liability of the business through the corporate veil.
If you conduct business transactions of any kind personal assets are exposed to all liability and debts of the business. Simply forming a business entity is not enough, individuals must establish, fund and operate the business properly in order to maximize asset protection benefits.
Types of Business Entities
The most common form of business entities are corporations and LLCs, in some cases professional corporations, limited liability partnerships and other entities are formed – attorneys, medical practitioners and specific professionals, in some states, may be required to form a professional corporation or create a limited liability partnership, which a company or corporation can be a partner of.
Corporations offer outstanding protection for shareholders, officers and directors of a business and are the most formal of all business entities with operating formalities. These entities are excellent for businesses with many shareholders, employees and optimizing tax deductions for healthcare plans and medical expenses. Corporations are not recommended for owning real property and shares are considered a personal asset that can be used to satisfy a judgment which would need to be protected in a personal asset protection strategy.
Limited Liability Companies
A Limited Liability Company offers the same personal liability protection from business transactions for its managers and members with fewer formalities and are pass-through tax entities. LLCs are highly recommended for owning real property due to the fact that LLC interest cannot be seized to satisfy a judgment should a company member be sued. Property held in an LLC is protected from personal liability of the managers and members.
Maintaining Business Entities
Corporations and companies can be established quickly, easily and at a nominal cost for the protection. In order to maximize the benefits of a business entity simple operating formalities and requirements must be satisfied in order to maintain separation of personal and business affairs. All business entities require annual information statements to be filed in the state which they are formed and corporations require annual meetings and minutes to be kept.
The stronger the separation of business funds, assets and transactions are kept, the stronger the corporate veil protection is. If the funds of a business are used to pay personal debts or bills, or vice versa, what’s called “alter ego” theory could be used to challenge the entity and pierce the corporate veil. Professional accounting and a proper business presence should be part of operating and maintaining a business entity.
Small business owners should be especially concerned with protecting personal assets from liability of the business. Contracts, torts, employees, company vehicles and many more business related liability hazards pose a threat to one’s personal assets.