06 Apr The Most Effective Way To Protect Your Personal Assets From Business Liability Claims
So, you have taken that giant leap in your life and gone into business for yourself. You have entered into a lease agreement for office space, leased a copier/scanner/printer, purchased a computer, hired staff, purchased liability insurance, hung out your shingle advertising your business, generated many new customers for your product or service, and you’re ready to go, right? Well, maybe not.
The fact is, in our highly litigious society, each of the simple acts mentioned above not only builds your business, but each has some legal ramifications that might someday negatively impact upon your business. If proper care is not taken at some point during the life of the business, such claims might also impact your personal assets if you have not taken the proper steps to protect those assets.
One of the simplest, yet most effective, ways to protect your personal assets from a misstep in your business life is to either incorporate the business entity (as a “C” or “S” Corporation), or establish a Limited Liability Company (“LLC”).
The creation of either of these business entities generally shields you and your personal assets from exposure for liability incurred as a result of your business activities. By adhering to certain rules designed to keep your business and personal activities separate (e.g.: not using business assets for personal items, or not co-mingling business and personal banking matters), one can ensure that one’s personal assets will not be placed at risk due to exposure from liability for the acts of the Corporation or LLC.
C/S-Corporation vs LLC
While these business entities provide the advantage of limiting one’s exposure to personal liability, careful consideration of the business’ goals and objectives must be given when determining whether to incorporate or create an LLC.
For example, while a “C” Corporation generally exposes income generated by the business to double taxation (once when the income is generated and when the income is distributed to shareholders), the LLC will generally be taxed once. In addition to tax ramifications, one must also consider the goals and objectives of the business. The LLC allows more flexibility in structuring the internal arrangements of the business, such as allocation of income, gains, losses, deductions, etc, as well as more flexibility in providing employee benefits.
Both “C” and “S” Corporations present more difficulty in structuring the allocation of profits in a manner other than in proportion to ownership of shares in the Corporation. Hence, the LLC might be the preferred choice of business entity if these are the major concerns of the business owner.
In conclusion, the business owner – along with the legal advisor and accountant – must consider the business’ goals and objectives, such as limiting tax exposure, flexibility in allocation of profits, or the provision of employee benefits, when determining the most effective form of the business entity. However, proper selection of the business entity will provide the business owner with protection of personal assets from liability claims, as well as maximizing business profits.
This blog post is not considered to be legal advice, and is intended for educational purposes only.