Why You Need A Business Entity

When starting or expanding a business, many owners wonder if they should form a business entity and, if so, which one they should use. There is a wide variety of information and “pitches” being made on the Internet regarding the benefits of certain entities versus others. When you cut through the flak, however, the primary reason for forming a business entity is to create protection from personal liability arising from your business activities. It is well established that up to eighty percent of businesses will fail in their first two years. Many of these businesses, and probably yours, carry a high level of personal risk for their owners. If you are not using the correct entity for your particular business, you are going to be personally liable if the business fails. Do you want to expose your home, car, and other assets? How about the assets owned by your spouse or their paycheck from a regular job? Selecting the correct entity for your business prevents such nightmares from occurring. More importantly, you can sleep at night knowing that the worst thing that can happen is losing your investment in the business, not your home. Business Structures several business structure options exist in the modern corporate world. Following is a short explanation of the most common business structures. Corporations come in two basic forms, a “C” corporation, and an “S” corporation. There are a variety of differences, but the central one is a tax issue. Briefly put, “C” corporations are taxed on their revenues and you are then taxed separately on any money you take out of the corporation. An “S” corporation passes through all taxes to the shareholders with the information being reported on your tax returns. Regardless of the tax classification, a corporation is considered an independent entity from a legal standpoint. This independent status acts as a shield between the activities of the business and your assets. As a practical example, Kmart recently filed for bankruptcy. The individual shareholders were not required to file bankruptcy and lost nothing more than their investment in the stock of the company. Forming and using a corporation for your business activities will have the same effect, to wit, your assets will not be wiped out if the business fails. Limited Liability Company A limited liability company, or “LLC” as it is better known, was a very popular entity choice in the early 1990s. LLCs are similar to corporations but can be taxed as a partnership. In California, the LLC can have either one owner or two. Regardless of the number, these owners carry the legal title of “member. The LLC provides a shield for your assets just like a corporation. Partnerships, In my opinion, it is better to have died a small child than be in a partnership. Unfortunately, many business owners form partnerships and dont even know it. This occurs when they go into business with another person. If no business entity is formed, the law considers the business to be a partnership and treats it accordingly