Business owners must make a strategic choice when determining how their organization should be structured. There are myriad concerns when selecting the right business form for your operation. Minimizing tax liability and ensuring that you are prepared for the ongoing costs and paperwork requirements are two of the primary concerns. For most business owners, however, one of the most important factors in selecting a form of business is the potential liability that they face.
There are significantly different liability concerns for different business structures and you must consider the extent of the risk you take on when you own a business. An experienced San Diego business formation lawyer at Sepahi Law Group can provide you with advice on your potential risk exposure and assist in choosing the best type of business structure for your enterprise. Call today to learn more.
Liability Concerns for Different Business Structures
Sole proprietorships and general partnerships are the riskiest types of business to own because you have virtually unlimited liability under these operational forms. When you are a sole proprietor, there is no distinction between you and the business. If the business goes into debt, you go into debt. If the business is sued, a judgment can be collected against you personally. This means that you could end up losing your home or other personal assets, and you could end up being personally bankrupted if a problem occurs with the company.
Partners take on the same risk as sole proprietors, although there is arguably an added level of exposure. When you are a partner in an enterprise, you are jointly and severally liable for the actions of the business. If your partner does something illegal or negligent and the business is sued, you could end up with your personal assets put at risk as a result. If your partner goes into debt for the company, you could become responsible for paying off the money the business owes. This is true even if you were unaware of what your partner was doing.
Because both of these methods of owning a business have a significant financial risk, it is important to consider other options and explore liability concerns for different business structures such as corporations and limited liability partnerships.
Corporations generally provide strong protection for all business owners. As long as corporate formalities are maintained and the business actually acts like a corporation, your potential losses and liability are limited to the money invested. This means even if the business is sued or goes significantly into debt, you cannot lose more money than you put into the company. Corporations can be the most complicated business structure to create and tax issues are raised, depending upon whether you are a C-corporatin or an S-corporation. Still, this business structure is chosen frequently because of the limited liability. Limited liability companies also provide protection similar to that provided by a corporation, but the formation and ongoing paperwork requirements may be similar.
Other options include limited liability partnerships. Limited liability partnerships can shield some business owners from personal risk but only if they are not actively involved in the day-to-day company operations.
Understanding the liability concerns for different business structures is necessary before forming a corporation. Call Sepahi Law Group, APC today to speak with a San Diego business formations lawyer who can assist you in limiting your liability.